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Guide to Starting a Business With Student Loan Debt

Starting a Business While Paying Off Student Loans
Lauren Ward
Lauren WardUpdated August 2, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Student loan debt makes up the second largest amount of debt in the nation behind mortgages. Typical standard repayment plans for federal student loans and private student loans take a total of 10 years to pay off, and the average student loan debt is $37,790.But what if you want to start your own small business? If you’re an entrepreneur, cash flow is key. Freeing up every possible dollar can be the difference between success and becoming another statistic. Below we talk about the interplay between paying student loans and starting a small business, and what your options are.

Refinancing Student Loans While Starting a Business

One thing is for certain: Using a student loan to start a business is not okay. That would get any loan recipient into trouble as student loans are earmarked for education costs.Once you graduate and are repaying, if you can lower your monthly student loan payments, you’ll have more money to put toward your business. Should opportunities or expenses arise, a lower monthly student debt obligation may help your business grow and succeed at a faster rate. One way to do this is by refinancing your student loans. When refinancing your student loans, the most important thing to keep in mind is how your current rate and monthly payment would compare to your new rate and monthly payment. For many student loan borrowers, refinancing can help free up cash month to month. Of course, there are many steps to starting a business besides refinancing existing debt. For example, where you open up your business is just as important as the business idea itself. However, if student loans are eating up your cash every month, refinancing them may just be the best way to help your new business thrive.   

How Refinancing Can Help 

1. Lowers Monthly Payments

Refinancing your student loan debt may lower your monthly payment, which would help free up cash for other business expenses. Sometimes business owners ask, “Can my business pay my student loans?” The answer is no. Unfortunately, student loans are not tax deductible for businesses and are not business expenses. But the good news is that you can help pay for business expenses by freeing up cash and lowering your monthly payments via a student loan refinance.  

2. Consolidates Debt

Consolidate your debt and you’ll have fewer monthly payments to keep track of. Depending on the rates you received with the loans, you may even receive a better interest rate, too, by doing this. Through debt consolidation, you may save money in interest and improve your credit score because you’ll be more likely to make your monthly payments on time.

3. Puts More Money Toward Your Business

As discussed, every dollar is vital to a company’s success. The more money you have to put into your business in the beginning, the more likely it is to succeed. You can truly make your money work for you, but you have to have it in the first place for this to happen.  

4. Lowers Your Debt-to-Income Ratio

Getting a lower monthly student loan payment will, in effect, get you more money for your business month to month.If you are able to lower your monthly student loan payment, this in turn would lower your debt-to-income ratio. Should you need to take out a personal loan or business loan, this may even help you qualify.

Disadvantages of Refinancing

1. Removes Option for Debt Forgiveness

Federal student loans offer debt forgiveness for graduates who go into certain kinds of work. Programs like Teacher Loan Forgiveness and Public Service Loan Forgiveness will forgive all or a portion of remaining student loan debt if you continue with a specified job for a set number of years.However, if you refinance, you lose the option to receive any student loan forgiveness for the amount of federal loans that you have refinanced.

2. Produces a Possible Higher Rate 

If your credit score has gone down in recent years, or your rate was already low to begin with, you are unlikely to receive a better rate if you refinance. Refinancing may help with the monthly payment amount (because of an extended loan term), but it may not help you save any money overall. Consider using an online loan calculator to see if it makes financial sense to refinance. As a business owner, you have to think about the long-term financial ramifications and the short-term ones as well as refinancing or not refinancing. 

3. Eliminates Income-Driven Repayment Plan   

Similar to debt forgiveness, when you refinance, you lose the option for an income-driven repayment plan. Income-driven repayment plans look at your gross monthly income and adjust your monthly payments to better fit within what you’re actually making. The Pay As You Earn Plan, for example, makes sure your monthly payments don’t exceed 10% of your pay. Because government programs like this are for federal student loan debt, if you refinance, you would lose access to them.

4. Adds More Payments When You’re Already Almost Done

While you could receive a lower interest rate by refinancing, it may not be to your benefit if you’re almost done paying off your student loans. Lenders typically offer loan terms between 5 and 20 years. Therefore, if you only have a couple of years left, it may not make sense to refinance. To make sure it does, use an online student loan calculator and enter your information to calculate the total amount paid.

4 Tips for Starting a Business

1. Get a Mentor

You may think finding a mentor to help you start your own small business is a matter of fate and personal connections. This is not the case.For example, the SBA has an “assistance tool” on its website to help business owners find support in their area, and there are websites like SCORE that will also connect you with an experienced business mentor for free.Be active about finding mentors that can help you with your important business decisions. 

2. Start Small & Grow

In today’s business world, entrepreneurs don’t have to go “all in” with a brick-and-mortar shop and thousands of dollars worth of inventory and debt. It’s more than possible to test the waters with an online presence and a little bit of marketing. This means that, until you have proof of concept, consider starting small to see how the market reacts. Doing this, you may even end up pivoting to something more lucrative. 

3. Bring in Help When Needed

Just because the business idea is yours, it doesn’t mean you can’t share in its creation with a trusted friend or partner. Everyone has their own strengths and weaknesses, and a business partner could help fill in any gaps you’re missing. Don’t be afraid to call someone in to help your business grow.  

4. Find Other Income Sources

Getting the money to start a business doesn’t have to come from traditional sources. Crowdfunding, for example, can be an excellent way to raise capital. There are four different kinds:
  • Donation based
  • Rewards based
  • Equity based
  • Debt based (or P2P) 
You may also want to consider working with an angel investor. An angel investor would purchase a percentage of your company’s equity for an agreed-upon price. The benefits of working with an angel investor are that the money does not have to be repaid and the investor may be able to provide valuable advice on major business decisions. Lastly, all business owners should consider applying for small business grants. Grants, like donation-based crowdfunding, do not have to be repaid. Just know that, while they require less work than crowdfunding, they may have just as much competition if not more. 

The Takeaway

There are pros and cons to refinancing student loan debt, but if you have a business, cash flow is vitally important. If refinancing will lower your monthly payment and total amount paid, then you may consider speaking with a lender. Plus, by lowering your monthly payment, you will lower your DTI, which may help you qualify for additional capital if and when you need it.  At Lantern Credit, we help borrowers compare rates and loan terms between multiple lenders so they can easily find the best loan for their student loan refinance.

Frequently Asked Questions

What are the consequences of refinancing student loans?
Is it a good time to refinance my student debt?
Will refinancing hurt my credit score?
Photo credit: iStock/ljubaphoto

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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