The Kamala Harris Student Loan Forgiveness for Entrepreneurs Plan
California Senator and Democratic Party presidential candidate Kamala Harris just proposed offering up to $20,000 in student loan forgiveness to Pell Grant recipients.
Yesterday I announced that, as president, I’ll establish a student loan debt forgiveness program for Pell Grant recipients who start a business that operates for three years in disadvantaged communities. https://t.co/ldwuC9RiIE
— Kamala Harris (@KamalaHarris) July 28, 2019
But there’s a catch.
A big one.
To qualify, you’ve got to start a business.
In a “disadvantaged community.”
Harris also proposes allowing qualifying borrowers to have their loans deferred interest-free for up to three years while they work on qualifying.
Harris’s plan got a few hilarious send-ups on the Internet, including the Oddly Specific Kamala Harris Policy Generator.
There were also more substantive criticisms:
Just trying to understand who these people are who were granted pell grants but also have the capital to start a business in a disadvantaged area and can ensure it is successful for at least three years
— Adriana Lacy (@Adriana_Lacy) July 28, 2019
The Target: Wealth Inequality
But Harris’s real target here is not the student loan crisis. As significant as it is, Harris’s real target is the racial wealth and opportunity gap. On average, and black and Latino households make less income and amass less wealth over time than white households. She’s also looking to boost economic activity in disadvantaged areas – many of which, but not all, are in minority-majority areas.
Her plan may or may not be effective – but her plan only makes sense when viewed in that context. The real goal is reducing economic inequality and stimulating investment in economically challenged areas. Reducing student loan debt and benefitting student loan borrowers is a sideshow.
Student Loan Debt is a Drag On Business Formation
Student loan concerns are significantly weighing down business formation. A 2015 study from the Philadelphia Federal Reserve found a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for the smallest group of small businesses, those employing one to four employees. This is important since these small businesses depend heavily on personal debt to finance new business formation. Based on our model, an increase of one standard deviation in student debt reduced the number of businesses with one to four employees by 14% on average between 2000 and 2010.”
There are several reasons for this:
First, people with student loan debt are under pressure to “play it safe,” and take jobs with steady salaries in order to prevent default on student loans and other debts. The system discourages risk-taking.
Second, people with student loan debt often find it more difficult to qualify for a small business loan. Smaller businesses often must sign a personal guarantee on business loans.
“Given the importance of an entrepreneur’s personal debt capacity in financing a start-up business, personal debt that is incurred early in life and that restricts a person’s ability to take on future debt can have profound implications for the growth in small businesses,” said the report.
The Harris Plan
The plan Harris details here for student loan forgiveness plan is just one plank of a much broader set of proposals.
- Invest $60 billion in STEM education at HBCUs and other minority-serving institutions.
- Creating a $10 billion infrastructure grant program for HBCUs and other MSIs. Institutions will be able to use the funds to build classrooms, labs, and other facilities.
- Create a $50 billion fund at the Department of Education to help HBCUs and other MSIs build up STEM education. These dollars can fund undergraduate and graduate scholarships, fellowships and internships for students. They can also help provide the institutional and curricular support STEM students need on their pathway to success. Funds will also help provide cutting-edge research equipment, training, and supporting faculty, lab technicians, and post-doctoral fellows.
- Provide $2.5 billion to support HBCU programs that will generate Black teachers,
- Create a $12 billion capital grant and technical support program. This will go directly to helping minority small business owners start businesses.
- Bring back the State Small Business Credit Initiative that supported state programs to strengthen small businesses. Invest an additional $10 billion in the fund and add incentives to encourage the funding to be used to support minority small businesses operating in high-poverty communities.
- Reform Opportunity Zones and set new goals to make sure funds go to minority-owned small businesses, prioritize lowest-income neighborhoods, prioritize hiring in those neighborhoods, and have safeguards to ensure that housing projects that are built actually contain affordable units.
- Ensure that information on this program is collected and made public to ensure the reformed Opportunity Zones program achieves the program’s goal of improving the opportunity for people and communities most in need.
Whether this plan as a whole is good policy or not we leave to others. We do note that going for the Kamala Harris forgiveness program is a very risky proposition. The vast majority of small businesses fail over the first few years. Any entrepreneur who takes out a small business loan and then runs into trouble will wind up worse off than when he started.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.