Erika Kullberg did everything right.

In 2015, during her third year at Georgetown Law, she and classmate Jimmy McNamara founded ReferU, which added a social dimension to the referral of new tenants for apartment buildings. The partners made their way around a conference for the apartment-management industry, memorizing the names and faces of big players they wanted to approach. There, they scored meetings that produced verbal commit­ments from three property-management businesses.

Wanting a mentor, they reached celebrity VC Chris Sacca by trying multiple permutations of his Gmail address, and landed a Skype session. Interns came on board. Angels began to circle.

In February 2016, Kullberg assessed her situation, weighing the potential of ReferU against a lucrative offer from inter­national law firm Morrison & Foerster. The deciding factor in favor of the legal job: her $200,000 in student-loan debt. In April, a month shy of graduation, she and her similarly indebted co-founder reluctantly shuttered their fledgling business.

"I really wanted to pursue the startup," says Kullberg. "But student loans are handcuffs."

After the pandemic knocked the wind out of our economy, recovery plans focused mainly on saving existing small businesses rather than breathing life into new ones. Yet entrepreneurship is critical to emerging from the Covid-induced recession. Startups drive almost all net new-job creation. They contribute disproportionately to innovation, breaking new ground while also spurring midsize and large companies to follow suit. And perhaps most important in the current climate, startups are well-positioned to respond to drastic changes in consumer and business behavior, recognizing and acting on opportunities born of adversity.

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All of these factors would seem to bode well for entrepre­neurs. But the long-term trend for new businesses hasn't been quite so rosy. Some of the negative factors--including market dominance of large, established companies and insufficient early-stage funding--are well-documented. But as Kullberg's experience indicates, student debt also is a major culprit. In the U.S., it now stands at around $1.7 trillion, up from $521 billion at the end of 2006, according to the Federal Reserve. That burden is spread across close to 45 million adults, with three-fourths of the graduates from private, nonprofit schools holding an average debt of more than $32,000.

For aspiring entrepreneurs, student debt reduces the amount of cash avail­able for startups and affects their credit score, making business loans tough to secure. It also renders more daunting the prospect of failure, which increases risk aversion.

The impact of debt may show up as well in the share of new entrepreneurs between the ages of 20 and 34, which fell to 27 percent in 2019, from 34 percent in 1996, according to a recent Ewing Marion Kauffman Foundation study. In a 2019 survey of college students planning to graduate within 12 months, 47 percent of those interested in entrepreneurship cited student loans as the single greatest deterrent to starting a business after earning a degree, according to Value­Penguin, a personal finance website owned by LendingTree.

"The assumption historically was that the best time to take this sort of risk and do a startup was right after school," says Senator Maggie Hassan (D-N.H.), who in 2017 introduced a bill to offer student-debt relief for qualified founders and their employees. As governor of New Hampshire and later as a senator, Hassan repeatedly heard from college students "who thought they had good ideas [but] weren't going to pursue them after they graduated because of student debt," she says. (Hassan is pre­paring this year to introduce a rebooted version of the bill, which was not put to a vote previously.)

The problem isn't just that young people are postponing their big dreams. Sixty percent of student borrowers expect debt to linger into their 40s, Citizens Bank found in 2016. Given that the average age of founders in high-growth industries is about 40 at launch, that expectation could represent a significant drag on people imagining startups as their second or third acts.

Debt stops startups like Kullberg's ReferU before they really get going. It also has a detrimental effect on businesses that do manage to launch, slowing their growth and blunting their ambition. It's a cruel paradox that the rocket fuel of the startup economy--education--can also prevent liftoff, because of the enormous investment it demands. What follows is a look at how fledgling entrepreneurs are bearing up under the often crushing burden.

The Day-Job Dilemma

By the time Lonny Ruben had graduated from Arizona State University in 2014, he'd already started three small busi­nesses. He was itching to start more, but $156,000 in student debt scratched the idea. "I was a born entrepreneur," he says. "But I needed to pay my rent and make payments on my loan."

I really wanted to pursue the startup. But student loans are handcuffs."

Ruben took a job at a large food dis­tributor, where he got the idea to purchase vending machines and cus­tomize them for specific diets. He launched that business--Bunny James--in 2015. But he still put in 50 hours a week for his employer, forcing him to stay up until 3 a.m. to work on his business. To save money, he crammed into a two-bedroom Los Angeles apartment with seven roommates.

For four years, Ruben juggled his two jobs. "The business needed me full time, but I couldn't jump because of the loans," he says. In April 2019, he finally quit. Bunny James's revenue doubled to nearly $2 million in a year, he says.

"If I'd given it all my time, I think we would've quadrupled it," he says. "The debt kept me from doing that."

Sergei and Vadim Revzin are all too familiar with stories like Ruben's and Kullberg's. Together the brothers founded School16, a virtual tech educa­tion program. For their students, the Revzins say, debt leads to constant inner conflict. "Should they be actively inter­viewing for a job, or take a job offer they've already got?" says Sergei Revzin, who is also a venture investor at New York University's Entrepreneurial Institute. "It is something we hear on a weekly basis."

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Of course, many otherwise employed entrepreneurs toil on startups in their spare hours. But their paying jobs drain energy and focus. Businesses receiving less than their founders' full attention typically take longer to get to revenue, and from there to profitability. Conse­quently, they are more likely to fail.

And after-hours entrepreneurs can forget about raising money. "Anybody working on a business part time is not going to find growth capital," says Karthik Krishnan, an associate professor of finance at Northeastern University. "No investor will give their money to someone they think is not committed."

The Modest-Ambition Trap

While planning her wedding in 2011, Sarah-Eva Marchese got the idea for an online business offering customized flower arrangements. But she carried about $32,000 in student loans. Her now-husband, fresh out of law school, owed six figures. For two years, the couple lived in a room in an old hotel in San Diego.

Without savings and constrained by her loan payments, Marchese ratcheted down her ambition to a downloadable PDF that helps brides communicate their ideas to florists.

"I decided to do something teeny-tiny in part because of the debt," says Marchese. "If you take out a loan for the privilege of higher education, you are making a promise to pay it back in a timely and responsible manner. The decision to start a high-risk company flies in the face of that commitment."

After a few years, the couple moved to Illinois and attended a pitch event where people advised Marchese to go bigger. She raised money from friends and family, and then built a network of investors. Based in Rockford, Illinois, Floracracy, a business closer to her original vision, finally launched this past October, eight years after she'd conceived it.

"Do I completely stop our growth to focus on loan payments?"

Marchese's experience has led her to become an advocate for student debt-laden founders. In February 2019, she co-wrote an opinion piece for The Hill with John Dearie, president of the Center for American Entrepreneurship (CAE), an advocacy group. "Freed from the burden of servicing student debt," they wrote, "many would-be entrepre­neurs will take the risk of launching perhaps the next Microsoft, Google, or Tesla."

Marchese entertains no illusion of becoming as big as those companies, but she's proud to employ 25 to 50 people, depending on the season, and support the businesses in her supply chain. She's well aware that startups matter, first and foremost because of their outsize role in job creation. That's one reason why the Kauffman Index of Growth Entrepre­neurship measures only employer firms, of which there are roughly five million in the United States. But that number has grown just 6 percent since 1997, according to the Small Business Admini­stration. The number of non-employer companies has risen 58 percent in the same period. And while a few soloists have multimillion-dollar revenue, average earnings are just $47,000.

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No one yet has studied the correlation between student debt and the rising number of non-employer companies. Sometimes it's a problem of stasis. As the weight of financial obligations bears down, entrepreneurs who need immedi­ate income hang out their shingles as consultants or contractors. Eventually, they have to take other jobs or accept that they are stuck as soloists because that is what's paying the bills.

Another problem: People burdened by debt often operate with a "scarcity mindset," a fear of never having enough money, which prevents them from attempting ambitious ventures. "You can start small and say in two years or three years, when there is a bigger opportunity, you will take a bigger risk," says Sergei Revzin. "But with a scarcity mentality, you might think of risk as something you cannot take even later on."

The You-or-Your-Business Conundrum

The roughly $70,000 in debt that followed Kenzie Biggins out of a two-year graduate program at Georgia's Savannah College of Art and Design weighed heavily on her as she started Worxbee, a provider of virtual executive assistant services. At first, she was paying $450 a month toward her loans. "Then I started getting letters: It was time to ramp up the payback," says Biggins. "Twelve hundred dollars a month to stay on course. I felt trapped."

At that point, Biggins was contracting with three executive assistants and wanted to recruit more. "I was not paying myself enough to meet the minimum payment," she says. "And I faced the decision: Do I continue to hire people and focus on growing, or do I completely stop our growth so I can focus on student-loan payments?"

Biggins compromised. She continued to bring on executive assistants but did not, until recently, hire someone with the management expertise her business needed.

Last year, Biggins did the thing she had most resisted--asking her parents to help with her debt. When they learned how much interest had accrued--roughly $40,000--they agreed. "It took time to work up to have that conversation with them," says Biggins. "There is a lot of shame around student debt."

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The scarcity mindset that makes founders think small affects their will­ingness to invest in their startups as well. When entrepreneurs fear the conse­quences of delinquency and default, they weigh every risky dollar spent on their businesses against the obligation of paying down debt. Forty-three percent of indebted Millen­nials who have started or plan to start companies say student debt affects their decisions about hiring or investing in their businesses, according to a 2015 poll by Young Invincibles and Small Business Majority.

Debt-ridden founders may also be less selective about whom they take on as capital partners, prioritizing ready cash over the best alignment with the business. And they're less likely to launch risky growth companies. To keep up with their payments, they need money fast, and so can't take the time required to experiment and innovate.

Potential Policy Solutions

Attempts to address student debt during the pandemic--including provisions in the Cares Act and an executive order from President Trump--have provided only temporary, limited relief. During his presidential campaign, Joe Biden said he supported forgiving a minimum of $10,000 of student loans per person, and other lawmakers have advocated even more ambitious debt forgiveness plans. That could raise GDP by more than $100 billion per year, on average, accord­ing to a Bard College study. It would also lower unemployment in a job market battered by the pandemic and might help stave off the steep falloff in startup rates that followed the 2008 recession.

Several other ideas are circulating to provide relief for founders. Hassan's bill, called the Reigniting Opportunity for Innovators Act, would allow startup founders and their full-time employees to defer student debt payments--with­out accrual of interest--for three years at any point during the first five years after launch.

The CAE's Entrepre­neurship, Growth, and Opportunity Act takes another approach. It would enable founders to consolidate their debt into a fixed-rate loan, cap monthly payments at $200, and forgive remain­ing debt for people who have paid $12,000 over five years while launching a business. Most intriguing, if those entrepreneurs make more than $250,000 in salary and equity at any time in the subsequent 10 years, they would have to pay a small percentage of their annual compensation to the U.S. Treasury.

Such programs might have kept alive Kullberg's ReferU. Happily, after abandoning that project, and following a Hercu­lean effort to dispatch $225,000 in debt in a span of less than two years, Kullberg started another busi­ness. In early 2020, she launched Plug and Law, a company that provides templates of legal documents, accom­panied by how-to videos, for small-business owners.

Plug and Law's market is the U.S. But the law firm that employed Kullberg offered higher salaries for postings in overseas offices. Insistent on becoming debt-free, Kullberg in 2016 moved to Tokyo. There, she met the man she would marry, and decided to stay put.

So, finally, Kullberg is realizing her dream. But Japan, not the United States, will reap the benefits.