How to Start a Business While Paying Off Student Loans

For many entrepreneurs, starting a business means more purpose, flexibility, freedom and control at work. But when student loans take up a big portion of your budget, that dream may be harder to achieve.

The median monthly student loan bill among those in repayment is $222, according to data retrieved by Student Loan Hero. That doesn’t leave much room for financial risk-taking for those fresh out of college. In fact, the share of entrepreneurs between 20 and 34 years old decreased from 34% in 1996 to 24% in 2016, according to the Ewing Marion Kauffman Foundation’s most recent Startup Activity report.

With ingenuity and forethought, though, there’s no reason why young entrepreneurs should hold off trying to start a business while paying off student loans.

Start with an idea that is low-risk

If you’re currently working full time, consider starting a business on the side so you can keep any benefits you currently receive, like health care and access to an employer match on retirement savings. That will also help you evaluate the viability of your business idea without going all in.

Make sure you secure any insurance, permits, licenses or certifications you might need for the business. Just because it’s a side hustle, doesn’t mean you can avoid red tape aimed at keeping clients, and yourself, safe. As a self-employed individual, you’ll also likely have to pay quarterly estimated taxes on side income, if federal and state income taxes aren’t automatically withheld from it.

Alternatively, you can ask your primary employer if you’re still working full- or part-time for a separate company to take more tax out of your paycheck to avoid paying additional estimated tax.

Adjust your student loan payment

Reducing your bills, like those for student loans, can provide more freedom to fund and launch your business. Some options to consider are:

Consolidation and refinancing: If you have good credit — typically defined as a credit score of 670 or higher — or access to a creditworthy cosigner, you may be able to refinance student  loans to a lower interest rate. This process is also referred to as private student loan consolidation.

It’s an especially worthwhile option for high-interest private student loans. When you refinance federal loans, you’ll lose the ability to sign up for forgiveness programs and alternative payment plans. But private loans come with fewer payment-reduction options, so you have less to lose — and more to gain in interest savings, as their rates are often higher than federal loans’ rates.

When you refinance, you may have the choice to stretch your repayment term over a longer period, which could lower your monthly payments. But when you make payments for a longer time, you’ll pay more in interest, which can cut into the overall savings refinancing provides.

Forbearance and deferment: It’s possible to postpone your student loan payments altogether through deferment or forbearance (depending on your circumstances) while you start your business. You can apply for deferment if you’re unemployed or are experiencing economic hardship. If you have federal subsidized or Perkins loans, interest will not accrue during the deferment period.

You can request forbearance for a wider variety of financial reasons for up to 12 months at a time, and extend it if you need it. But unlike deferment, interest will accrue on all types of federal loans during forbearance. That means you may owe more once the forbearance period has ended. Contact your student loan servicer to discuss which option is best for you, and how much it would cost over time.

Income-driven repayment plans: If you have federal loans, consider signing up for an income-driven repayment plan. Your payments will be 10-20% of your discretionary income, depending on the plan, which can lower your bill significantly if you’re working less for an employer while starting a business.

Your payments may not cover all the interest that accrues, which could mean a growing balance. Income-driven plans do provide forgiveness after 20 or 25 years, however, any forgiven amount may be taxed as income. The government’s repayment estimator tool can provide line of sight into how much you’ll pay overall — and potentially get forgiven — if you switch to one of these plans.

Work with a mentor

You don’t have to start a business all on your own. In fact, seeking the help of a mentor early can give you ideas for how to develop a business plan and get funding while keeping your own finances in shape.

Use the U.S. Small Business Administration’s local assistance tool to find a small business development center or other free support in your area. You can also request a mentor through SCORE, a national nonprofit that pairs entrepreneurs with volunteer business experts.

Finally, tap into your college’s alumni network to see if other entrepreneurs are interested in sharing their expertise. Ask the alumni services department if anyone comes to mind as a potential mentor for you, including professors and industry experts at the school. Or, search LinkedIn for entrepreneurs from your alma mater who may be willing to guide you.

Explore funding sources

Startup funding might feel like the biggest barrier to entrepreneurship when you have student loans. Banks and community organizations, for instance, offer loans backed by the U.S. Small Business Administration. But without a history of profitability as an established business, it can be hard to qualify. You may also not have a long personal credit history as a relatively recent graduate, which can be another barrier to getting traditional small business financing.

Self-funding a business is an option, but with limited resources as a result of student loans, you may be tempted to rely on credit cards. This can be a viable method for some businesses, but your first priority should be to make all your student loan payments on time. Missed payments will negatively impact your credit score, affecting your ability to get business financing and even a mortgage or personal credit card in the future. If you use credit cards to start a business, make a plan to pay off the charges in a reasonable amount of time to avoid ballooning interest.

Consider these other methods of financing, too, which may be more accessible — even with existing debt to pay off.
Crowdfunding: Loans from friends and family give you the ability to set the terms, including how long you’ll have to pay them back and whether the loans will accrue interest. Have a candid conversation about your ability to repay others investing in your business, and keep the lines of communication open if you find it’s harder than expected to keep to the terms you agreed to.

Crowdfunding, however, gives you the opportunity to raise money from a larger pool of investors than just friends and family — without having to repay the funds. Platforms including Kickstarter, Indiegogo and GoFundMe let you list a product or business others can contribute to, and you can offer rewards to investors in exchange for contributing. Check each site’s pricing page for details on how much they charge. You might see platform fees to list a campaign, transaction fees when a backer contributes to the campaign and transfer fees when funds move to your personal bank account.

Lending circles: Lending circles provide interest-free loans to low-income individuals and small businesses while helping borrowers improve their credit at the same time.

In a lending circle, a group of community members pays into a central pot, and members take turns receiving a loan. Monthly payments into the fund are reported to the credit bureaus, helping participants build a credit profile. You’ll need to apply and take a financial education course in order to participate. But you can use the loan you receive to help with startup costs, and to build credit so you can apply for traditional funding in the future. Search for a lending circle through local community organizations using the nonprofit Mission Asset Fund’s lookup tool.

Online lenders: You can search for funding from online-only lenders like OnDeck Capital or Kabbage to pay for a range of business expenses, including equipment and marketing. Online lenders generally offer faster application processes than traditional small business loans, and they may be easier to qualify for.

The trade-off, however, lies in online loans’ interest rates. Without good personal credit, you could see interest rates much higher than typical rates for credit cards, for example. Taking on debt for your new venture on top of student loans can be risky, so compare online lenders carefully and borrow only as much as you know you’ll be able to repay.

Paying off student loans can make financing a business difficult to start. But seeking advice from a mentor and making thoughtful decisions about how to launch it will move you closer to your vision of entrepreneurship.