Just talking about student loan debt cancelation gives Skyler Pearson chills, and makes her want to cry.

The co-founder and CEO of Nexgarden, a Portland, Oregon, indoor farming startup, she graduated from the University of Oregon in 2013 with just under $50,000 in student loan debt. When she launched her company in 2017, she had no idea how much that debt would tighten her operational budget and limit her access to capital--most recently, preempting her from obtaining a $100,000 bank loan to help Nexgarden grow its production capabilities.

So when President Biden took office, Pearson's mind went straight to one of his campaign promises: student debt cancelation. "Oh, my god," she recalls thinking. "This is a thing that could actually happen."

Indeed, Biden and other top Democrats have quickly made student loan debt forgiveness a top priority. The president has advocated forgiving $10,000 of debt per borrower, while Senate Majority Leader Chuck Schumer (D-N.Y.) and Senator Elizabeth Warren (D-Mass.) have pushed for a more aggressive $50,000 per borrower.

The state of entrepreneurship hangs in the balance, especially as the U.S. manages its post-Covid economic recovery. Small business traditionally plays an outsized role in job creation following recessions, and the country's record $1.7 trillion in student loan debt, spread across roughly 45 million people, threatens to limit legions of young and middle-aged dreamers from taking the entrepreneurial leap.

Economists and small-business policy advocates agree: A federal debt cancelation policy could boost entrepreneurship rates and unshackle currently debt-ridden entrepreneurs to pursue more aggressive growth plans. But which is better: $10,000 or $50,000? It's more complex than you'd think.

Unintended consequences

Karthik Krishnan's research is at least partially responsible for the simplest answer: The more debt you forgive, the better it'll be for entrepreneurship. But the Northeastern University economist strongly warns against that argument.

In 2015, Krishnan co-authored the first major academic paper to establish a definitive link between rising student loan debt and a decline in entrepreneurship. In a vacuum, he says, the inverse should be true: Less debt should cause entrepreneurship to rise. But we don't live in a vacuum, and deciding how much money to forgive comes with a bevy of unintended consequences.

Canceling too much debt could send interest rates skyrocketing and balloon the federal deficit, particularly when combined with Biden's proposed $1.9 trillion Covid-19 recovery package. Krishnan says those effects could be a drag on the economy, the recovery, and small business at large.

These are red flags for Republican deficit hawks, says John Dearie, founder and president of the Center for American Entrepreneurship, a Washington D.C.-based nonpartisan research and policy advocacy group. The more debt the Democrats propose to forgive, the harder it'll be to get the GOP on board. The need for compromise, Dearie says, helps explain why the administration's proposal is more limited: "They're trying to take a reasonable approach to trying to provide some relief, given the major obstacle to entrepreneurship that student debt poses--at a time when we need new business formation and the economic growth and job creation it delivers more than ever."

A short-term fix

Biden's plan may be more feasible, but critics say it won't make a sizable impact--and where small-business owners are concerned, that could be right. Krishnan says most entrepreneurs start to face serious problems once they hit $10,000 in student loan debt. The average student loan borrower carries almost $38,000 in debt; cutting that figure by $10,000 would still leave a hefty balance.

The ideal number for small business, Krishnan suggests, is somewhere between $10,000 and $50,000--and unlikely to exceed the student loan debt average. Of course, debt cancelation doesn't solely concern entrepreneurship. Moreover, Dearie says, it's a classic Band-Aid fix: Forgiveness papers over the problem temporarily without addressing any structural issues. Without longer-term policies targeted at factors like rising college tuition or loan repayment plans--which can be onerous--the next generation of American entrepreneurs will be back to square one.

For Pearson, the Nexgarden co-founder, that's a problem for another day. She's whittled her debt load down to $30,000, but her bootstrapped company lost money in 2020, leaving four of her six employees part-time and unpaid. Nexgarden remains afloat thanks only to two Paycheck Protection Program loans and the fact that Pearson's student loans are currently in forbearance, saving her $700 per month for now.

Chopping off $10,000 of that debt could accelerate Pearson's access to capital, cutting down the timeline for Nexgarden's next lifeline. Eliminating her debt entirely would enable her to immediately pursue growth, including some job creation--and finally paying her volunteer workers. "It would be a really big breath of fresh air to know that we're a little bit closer to access [to capital]," Pearson says. "I want our business to change the world, but first I want financial safety."