Student debt can create a daunting financial maze for would-be small business owners.
Recent research shows that regions where the population carries student debt boast significantly fewer small businesses. Does that mean that owning a small business is not an option for those with student loans to repay?
With careful planning, you can manage the payments on your student debt while running, and financing, your own small business. Here are five tips to help you make it work:
1. Know What You Owe
Stay organized and on top of all the information for each student loan you carry. Knowing how much you owe, when payments are due (and in what amount), and who each lender is gives you the power to figure out your best options for each debt you carry. You can look up information on your federal loans at the Federal Student Aid website.
2. Make Those Payments
Don’t slip up and miss a payment, especially while you’re in the preliminary stage of business start-up. A few missed payments can affect your credit score, which can then affect your ability to get financing for your small business down the line. Banks seem to be especially wary of lending to small business owners with student debt; looking into alternative financing options can give you the start-up cash you need. On-time payments will earn you the good credit score you need to qualify for both.
3. Adjust Your Federal Repayment Plan
For federal loans, there’s usually a standard 10-year repayment plan that you are assigned when you take on the loan. However, you can change that plan. There are several options that might give you more flexibility to put money toward your small business.
a. Extended Repayment: Changing to a 25-year repayment plan can significantly lower your monthly payments. This might a good option if your business is in a slow-growth industry, which includes metals and minerals, grocery stores, and specialized design services.
b. Graduated Repayment: Lower monthly payments at first, with an increase in the monthly payment amount usually every two years. Graduated repayment can work well for a small business with a capital-intense starting phase but a good chance of showing profitability within two years.
c. IBR (Income-Based Repayment): Your monthly payment would be 15% of your calculated discretionary income. If your small business will provide you a very limited salary for a while, the IBR plan might be a good option to keep your personal finances afloat.
d. Income Contingent Repayment: Your monthly payment is set each year based on your annual income, family size, and total debt, so your payments change as your income changes. If you’re starting a small business while supporting a family, the ICR can help you keep payments at a manageable level even if your salary changes each year.
e. Understand Requirements: Each repayment option has different terms and qualification requirements: investigate the details and requirements further before you sign on. Be aware that some of the options mean you’ll pay significantly more over time; when changing your repayment plan, be sure that your present plans aren’t setting you up for future failure. For example, graduated payments will increase over time, which could be disastrous if your seasonal business has regular months of low cash flow during which your salary dips and an increased payment is impossible to make.
4. Consolidate Private Loans
If you carry multiple loans from private lenders, take a look at debt consolidation. Packing all those loans into a single payment can help you to plan for and make payments more easily. Before you consolidate, find out the exact terms of each loan, including the interest rate, whether it is fixed or increasing, the length of the payment plan, and any fees or charges that might be incurred in the process.
Avoid taking out a home equity loan to use as your debt consolidation; you might need that equity in order to get initial financing for your small business.
5. Look into Debt Forgiveness
You may qualify for student loan forgiveness, or you might be able to become qualified and unburden yourself from that loan. Debt forgiveness programs include options for volunteers, military veterans and National Guard, teachers, nurses, medical researchers, and veterinarians.
You could spend time volunteering while you develop your business plan, and end up with forgiven loans and a solid business strategy. New platforms like SponsorChange and zerobound make volunteering in exchange for debt repayment a more flexible option, offering more volunteer opportunities than the federal programs do.
If owning a small business is your dream, student debt does not have to be an obstacle that stops you. Don’t rush into anything; taking considered, researched steps one at a time is your best bet toward success. So, do your research and find your best options; maybe your small business could be aiding future employees with their student debt a few years from now.