Economists have long believed that unchecked subprime lending caused the Great Recession and housing crash that followed. When jobs vanished and the stock market tanked, risky borrowers of those loans began losing homes and foreclosure rates spiked to historical highs.
But new research by Jacob Faber of New York University and Peter Rich of Cornell University reveals another culprit behind the foreclosures: rising college attendance rates and costs.
Faber and Rich examined commuting zone panel data for 305 metro areas with populations of more than 100,000 and found that from 2005–2011, a one percent increase in college attendance among 19-year-olds from median-income families was associated with 19,000 additional foreclosures in the following year, after controlling for housing and job market dynamics.
During the recession, parents covered at least 45 percent of their children’s college costs, and the researchers found that homeowners were more apt to refinance their home or put a greater percentage of their discretionary funds toward these costs, expecting home prices to rise.
As a result, struggling households became financially overextended and 2.172 times more likely to experience foreclosure than homeowners without college-age children, write Faber and Rich. They also said college attendance led to a similar outcome, with odds of a foreclosure 2.079 times more likely.
“In either case, college expenditures supported by financial optimism—and a reliance on the increase in house prices—could have made households vulnerable during the Great Recession, as unemployment, underemployment (i.e., involuntary part-time work), a credit freeze, and reduced incomes made it harder to make mortgage payments,” read the report.Fix your flatlining business in 30 daysTom Ferry shows you how to become an appointment-setting machine READ MORE
The researcher’s conclusions were backed up by the Panel Study of Income Dynamics, which determined that households with college students were more likely to experience foreclosure, “net of unemployment, income, having a high interest rate mortgage, race/ethnicity, region, education of the household head, marital status, and the presence of younger children.”
Faber and Rich said one solution for lowering homeowners’ risk of foreclosure as their children reach college age is to make the financial aid process more “transparent, flexible and sufficient” to help parents better plan and potentially lower their contributions.
Furthermore, the researchers say the government’s foreclosure prevention efforts need to go beyond mortgage terms to include a broader range of financial factors, such as the cost of college education.
“This warrants policy attention not only to risky home lending but also to other determinants of financial hazard — such as the cost of college attendance — that can overextend families and render us all vulnerable to future economic crises,” they write.
Email Marian McPherson