Creig Lamb is a senior policy analyst for the Brookfield Institute for Innovation and Entrepreneurship at Ryerson University in Toronto
Starting a business is risky. Starting a business amid a pandemic is riskier. Starting a business amid a pandemic with nearly $18,000 in student loan debt is much, much riskier.
In October, the federal government resumed collecting repayments and charging interest for roughly one million Canada Student Loans borrowers after pausing for six months. This temporary deferral brought some much needed financial relief to many of Canada’s youth, who remain among the hardest hit by the COVID-19 pandemic.
But as many advocate for an extension to the freeze, perhaps now is also a good time to discuss more permanent measures to address student loan debt in Canada. Such measures would not only support graduates as they navigate the immediate challenges of the economy, but they could also add some much needed fuel to Canada’s entrepreneurial engine, which will likely need a serious boost after the pandemic.
Over the past few decades, as relative government funding for postsecondary institutions declined, tuition fees have increased. Students, as a result, have taken on more and more debt to pay for school. Half of Canadian students who graduated in 2015 held student debt, owing a median of $17,500 at graduation. By 2018, almost two-thirds of these graduates still had outstanding debt.
While there’s limited public data on the demographics of borrowers, it’s reasonable to deduce that, since eligibility is based on family income and financial circumstances, the burden of student debt falls disproportionately on already marginalized groups, such as racialized and Indigenous populations.
All of this debt takes a toll. Individuals with outstanding student debt have fewer assets and lower savings and investments compared with those who don’t. Student debt can also result in insolvency. To graduates saddled with large debt loads, entrepreneurship might not seem like a viable option. And yet Canada’s future success depends, at least partly, on translating the world-class talent coming out of our postsecondary system into new businesses, whether they succeed, or fail, or land somewhere in between.
Entrepreneurs are a vital component of any economy, creating jobs, spurring competition and inducing innovation. While Canada is often lauded for its robust startup ecosystem, the rate of new entrepreneurship has been on a decades-long decline, which likely will become more pronounced in the coming months or years.
Despite entrepreneurs' critical role in the economy, starting a business is an uphill battle. Between 2002 and 2014, 63 per cent of companies survived their first five years – and 43 per cent were still standing after 10. For those holding student debt, this hill can be much steeper. A number of U.S.-based studies have shown that student debt load has a significant adverse effect on entrepreneurship.
Entrepreneurs need money and often use their own personal savings to start their businesses. Individuals who are paying back large student debt loads simply have less to put toward a prospective venture. Those with large outstanding loans may also have more difficulty accessing additional debt – the most common source of financing sought by Canadian firms – to finance their business.
Even if it’s possible to secure a business loan, servicing the accumulated debt requires stable, steady income, which may take a new business many years to achieve, if at all. In the fairly likely event that a new business fails, those holding student debt risk default, and the potentially severe consequences that come along with it. As a result, those with debt are more likely to choose safer career paths.
There is help for those who struggle to pay their student debt. The federal Repayment Assistance Plan, for example, allows single-family applicants with household incomes above $25,000 a year to pay no more than 20 per cent of their income on their student debt for six months, after which they must reapply. It also pays the interest not covered by the reduced monthly payments.
Those making less than $25,000 are not required to make payments on their loan at all. RAP was accessed by more than 330,000 people in 2018-19, up 11 per cent from the previous year. However, for many, the available government assistance is simply not enough. In 2018-19, there were more than 356,000 Canada Student Loans borrowers in default.
While there are many good reasons to help alleviate the burden of student loan debt, adding some much-needed dynamism into Canada’s entrepreneurial ecosystem should be one of them. Amid and after the pandemic, we should be doing all that we can to give our would-be entrepreneurs a boost. Addressing student debt would help to take some of the risk out of entrepreneurship, evening the playing field for many students looking to start a business.
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