What Paying for College Can Do to a Family Business

From law firms to bakeries, small businesses rely on many of the same ingredients for success as their larger peers. But one overlooked factor can impact their growth: whether the owner has a child starting college.

That’s because business balance sheets often intermingle with family finances in entrepreneurial households, and sending a child to college draws down available resources significantly, says Harvard Business School Assistant Professor Olivia Kim. Her analysis of 90,000 entrepreneurs finds that increases in household spending when a child turns 18 are associated with large declines in business revenue and expenses, which can thwart a company’s ability to grow.

As college costs continue to rise alongside tighter household budgets, entrepreneurs often face competing pressures between investing in their businesses and funding major family expenses. Kim finds that many are adjusting their business finances to help pay the high cost of college, which often runs in the tens of thousands yearly, effectively using the business as a financial buffer.

“There’s been a lot of focus on the growing liability of student loans on the household finance side, but there is relatively little work to understand how households trade off the investment that they undertake in their children's human capital versus productive decisions,” explains Kim.

College expenses cause financial strain

Small businesses account for 44% of US economic activity, with over 80% of firms run by sole proprietors or family members who maintain primary control. Meanwhile, higher education expenses drive over 40% of students into debt—and can create financial strain for family businesses when tuition bills come due, however long the expense was anticipated.

Kim comes from a family of small business owners, mostly in the wholesale trade, which sparked her interest in the topic. “I still remember growing up seeing how cash flow issues are really central,” she says. “The expense shocks could be smoothed better.”

What started as a dissertation chapter is now a forthcoming article in Management Science, “Trading Off Business and Family Investments: Evidence from US Entrepreneurial Households.”

Kim says the paper provides new evidence that the burdens of paying for college can affect the economy by influencing how entrepreneurs invest in their businesses.

Studying the finances of small business owners

Kim partnered with the JPMorgan Chase Institute to obtain quarterly data linking business performance with owners’ household spending. The dataset is unusual, she says, because it contains detailed financial information on 90,000 small businesses and their owners, including transaction-level data on owners’ personal checking accounts, as well as their debit and credit cards.

Kim put this data to work by comparing businesses whose owners had college-aged children, ages 18 to 22, against those with pre-college dependents, ages 14 to 17. She looked at how the performance of the businesses changed when owners’ children hit the higher education milestone, analyzing revenue growth, expenses, and profits. Kim studied closely held, privately owned small businesses that were productive and had growth potential but faced financial constraints, requiring careful allocation of marginal resources between household and business investments.

Business revenue and expenses drop

Kim finds that compared with firms whose owners have younger children, when a small business owner’s child turns 18:

• Total household spending rises by about 7% per quarter, or $1,302.

• For each dollar increase in household spending, business expenses decline by $2.26.

• Both business expenses and revenues drop by about 5%. Those declines are three times larger than the typical quarterly variation in expenses.

• The “age-18 effect” reduces aggregate revenue by $70 million quarterly, or roughly 8% of total business activity.

Despite the changes, profitability and standard measures of productivity remain broadly stable, suggesting firms scale down expenses without losing efficiency.