Do what you know and what you love. Find your passion and invest in it!
I know someone that started a hot dog/smokies stand outside of a major retailer and is making over $100,000 a year just selling hot dogs. I can't think of a cheaper operation to setup and there is no fancy know-how involved. I thought it was brilliant in it's simplicity. Another person I know sells association management software and he doesn't even earn that much.
I echo the comments of many of the posters around setting up a business that taps into your passion and knowledge. Everyone has something they have a special interest in and the knowledge you have developed in those areas is of value.
One fairly cheap way to set up a business is to establish a blog. Think of a topic you are really interested in and have a degree of knowledge on.
Two things I suggest you look in to is SiteBuildit!. It takes you through a step by step guide on how to set up and run a content rich website in which you can generate income from recommending products and services in your niche.
You should also read Rosalind Gardiner's Super Affiliate Handbook.
Good luck with your new venture and if there are any specific areas you would like information on I can point you in the right direction for products/services/books that will help you in setting up and running your business.
"So my question is this: What type of business would you recommend starting for about $1,000 to $2,000? I live in a small-ish Midwest college town. Any help would be great."
I would suggest affiliate marketing. You don't need a lot of money to get started in it and your knowledge of retail and what people are looking to buy would prove invaluable. You can start up your own website inexpensively and go from there.