This paper finds that graduates from universities that remove student loans from their financial aid policies are more likely to start entrepreneurial ventures and are more likely to subsequently get venture capital (VC) backing, particularly by reputed VCs, and get higher VC investment. Such ventures have higher sales and employment five years after founding. These results are stronger for universities with higher tuition and greater extent of R&D activity. Overall, these results document a significant adverse effect of student loans on a crucial engine of economic growth - high impact, venture capital backed startups.
Taken with the related article also recently posted here, Behavioral Effects of Student Loan Repayment Plan Options on Borrowers’ Career Decisions: Theory and Experimental Evidence, this paper reinforces the growing idea that student loans and the costs of higher education are not dissimilar from business loans, in that both allow both allow borrowers to take risks and, as Theodore Roosevelt said, “who at the worst, if he fails, at least fails while daring greatly….”
The difference, of course, is that a business borrower who fails while daring greatly can file bankruptcy and start anew, where a student borrower is bound in debt servitude for decades.