Student debt relief is the wrong way to promote entrepreneurship

June 28, 2016

Today, Hillary Clinton released a new policy agenda aimed at increasing technology, innovation, and entrepreneurship. These are laudable goals, but Clinton’s proposal to provide student debt relief to entrepreneurs is the wrong way to accomplish them. This proposal is based on a weak evidence base and would result in an inefficient allocation of subsidies.

Clinton’s proposal would allow student borrowers to stop making payments on their student loans—with taxpayers covering the interest—while they are starting new businesses. In addition, the founders of particular categories of businesses, such as those “that provide measurable social impact,” would be eligible for up to $17,500 in loan forgiveness.

The idea that student loans hold back entrepreneurship is based on shoddy evidence, such as public opinion polls in which respondents report that they did not start a business because of their debt. Polling data don’t tell us anything about the causal relationship between student loans and entrepreneurship, a question on which there is no high-quality evidence. (Gallup is probably the worst offender in terms of misinterpreting such polls.)

Student debt needs to be considered in light of both the repayment burden it imposes on borrowers as well as the returns to the educational investment it was used to finance. One way to avoid student loans is to skip college, which may have an even larger negative effect on entrepreneurship.

It is also important to note that income-driven repayment plans provide a safety net that protects all borrowers, including entrepreneurs, from unaffordable monthly payments during periods of low income.

Efforts to stimulate entrepreneurship through changes to the student loan system are likely to be inefficient and unfair. Clinton’s interest-free deferral proposal, for example, would provide the largest benefits to the borrowers with the largest loans. These high-debt borrowers may or may not be those most in need of taxpayer subsidies to help them start a new business, as the amount borrowed depends on a range of factors including family income, the college attended, and work and spending habits while in college.

The student loan program is already used for too many purposes for which it is ill-suited, such as subsidizing the employment of borrowers in the public and nonprofit sectors. There is nothing inherently wrong with subsidizing certain sectors of the economy—whether struggling nonprofits or Silicon Valley startups. But policymakers should do so directly, such as through tax credits, rather than through the student loan system.

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