How the Cost of College Affected Foreclosures During the Great Recession

November 2, 2018

Earlier this year, the National Center for Education Statistics determined that the cost of attending a four-year college in the U.S. had doubled between 1989 and 2016, even after adjusting for inflation. As an article in Forbes noted, the rate of growth in college costs was nearly eight times faster than the rate of wage growth during the same period. “There is a tremendous disconnect between the rising costs of education and the flattening of wages, which is only making it harder for graduates to make ends meet while paying back staggering amounts of student loans,” Forbesstated.

A new report in Demography by RSF grantees Jacob Faber and Peter Rich (New York University) examines how skyrocketing college tuitions may have affected home foreclosures during the Great Recession. Their study draws from data on intergenerational mobility constructed by RSF grantees Raj Chetty and Nathaniel Hendren (Harvard University). “We investigate a potential source of family financial overextension: the cost of sending children to college,” the authors write. Their abstract reads:

Although subprime mortgage lending and unemployment were largely responsible for the wave of foreclosures during the Great Recession, additional sources of financial risk may have exacerbated the crisis. We hypothesize that many parents sending children to college were financially overextended and vulnerable to foreclosure as the economy contracted. With commuting zone panel data from 2006 to 2011, we show that increasing rates of college attendance across the income distribution in one year predict a foreclosure rate increase in subsequent years, net of fixed characteristics and changes in employment, refinance debt, house prices, and 19-year-old population size. We find similar evidence of college-related foreclosure risk using longitudinal household data from the Panel Study of Income Dynamics. Our findings uncover a previously overlooked dimension of the foreclosure crisis, and highlight mortgage insecurity as an inadvertent consequence of parental investment in higher education.

Download or read the full paper.

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