With American graduates facing nearly $1 trillion dollars in student loan debt, thousands of Millenials are finding themselves falling victim to unemployment and bankruptcy rather than being able to actively take part in any job creation solutions.
In a time when our nation is in desperate need of economic stimulants, we cannot afford for any willing or capable group of entrepreneurially-charged individuals to be sidelined -- especially not our most educated. Moreover, it is important we realize that -- no matter what politicians say or do -- our nation's financial woes are not solvable by any one government program or single private enterprise solution. Rather, long-term economic recovery will depend on both sides working together -- government and the private sector -- to activate countless numbers of new entrepreneurs and small business owners. This will only come through the creation of hundreds -- if not thousands -- of private/public partnerships, and a series of innovative programs.
Consider the depth of the crisis that America's budding entrepreneurs are up against. The graduates of 2011 are the most indebted class in history, with an average student loan debt load of $27,300 (The class of 2012 is expected to surpass that amount, and the classes of 2007-2010 aren't far off.) In order to begin repaying such debts after graduation, many graduates seek out any employment they can find -- even less well-paid opportunities far outside their fields of study -- setting them back financially for years, transforming them into boomerangs that end up back home with their parents, and pushing their entrepreneurial desires to the back burner. Those individuals that do start businesses find themselves in a seemingly lose-lose cash flow struggle as potential startup funds are being siphoned off to pay loan debt. Both scenarios are less than promising, and hardly conducive to business creation. Worse yet, young people aren't simply struggling to pay their debt obligations, hundreds of thousands can't afford them at all. The US Department of Education recently reported that college loan default rates have risen to 8.8 percent, or $2.4 billion, ruining the credit scores of innumerable young people, many of which may have started businesses at some point in their careers, but now -- or in decades down the line -- may never be able to access traditional bank financing, growth capital or credit cards for a future business.
While there are many organizations and politicians actively engaged in debates about the merits of student loan forgiveness and deferment policies geared toward business and job creators (including the Young Entrepreneur Council and its partners, the Young Invincibles, who are collectively championing the Youth Entrepreneurship Act), a recently reformed government program may provide the first building block in the loan-relief-to-business-creation puzzle that has the capacity to transition our debt-ridden young people into self-employed job creators.
Created in 2007 by the Bush Administration, Income Based Repayment, commonly referred to as IBR, gives individuals with high debt relative to their incomes the ability to significantly cap their monthly federal student loan bills to 15% of their income by extending their payment period up to 25 years. While program subscribers pay back more interest on their loans over time, IBR enables borrowers to more easily manage their loan repayment, and maintain a decent standard of living. Any remaining debt after 25 years is forgiven.
While IBR has historically been very effective, it has been highly unsubscribed. This has been due to a lack of promotion by academia or the government about the program. The Obama Administration has now changed this, bringing IBR front and center as part of a new wave of reforms.
Beginning in 2012, as a result of the White House's plan, IBR borrowers will be able to cap their monthly loan payments to 10% of their income by extending their repayment period up to 20 years. In addition, government agencies will more actively promote IBR to entrepreneurs through organizations such as the Small Business Administration, making program information and registration more accessible and simplifying the application process. Under the new policy, any debt remaining after 20 years will be forgiven. This will enable thousands of aspiring entrepreneurs with college debt struggling in the current economic climate a means to free up even more much-needed startup and operating capital for their businesses.
The president's reformed IBR plan will effectively promote youth entrepreneurship unilaterally and blindly, without favoritism or attempting to subvert the free market, and will remove a major barrier to entry for all applicable young people who wish to transition into self-employment. Most importantly, IBR is an immediately deployable solution that will transcend many of the political debates that have held back previous rapid responses to fix economic problems.
Another strength of the Income-Based Repayment program is that other programs can build upon this. As an example, my organization just announced the upcoming launch of Gen Y Capital, an early stage investment company for generation Y, by generation Y, that will utilize the IBR program as part of its business model. After our startup founders subscribe to IBR, Gen Y Capital will go a step further, paying their remaining federal student loan debt obligations for up to three years, successfully eliminating college loan debt from the startup equation and allowing them to fully concentrate on their ventures during the crucial startup phase rather than seek out traditional employment for a paycheck, or fear default. Gen Y Capital will also provide our founders with access to Young Entrepreneur Council members who will serve as mentors and potential co-investors, provide access to entrepreneurship education courses and eliminate living expenses by having select founders live rent-free on partner college campuses. My hope is that this Fund will lead the way for other innovative public/private partnerships to emerge.
The bottom line is this: a short-term, narrow-minded view of this crisis will undoubtedly cause our nation irreparable harm in the future. Setting this generation back will not only hamper twenty-somethings from starting businesses today, but it will also have a drastic impact on the thirty-, forty-, and fifty-something job creators of tomorrow. IBR may not be the end all, be all solution, but it is certainly a solid building block that has the ability to strengthen many new foundations.
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