A recent study published in Demography [1], a bimonthly scientific journal from the Population Association of America, analyzed the potential impact of families with children seeking higher education on the rate of foreclosures. Researchers Jacob Faber [2] of New York University and Peter Rich [3] of Cornell University analyzed annual college data alongside foreclosure rates from 2005 to 2011 from 305 commuting zones in the United States. Covering 84.8 percent of the population, their findings showed a strong favor toward the correlation between a higher rate of families sending their children to college predicting a higher rate of foreclosures within the same year.
While these findings do not claim to suggest that a family’s decision to send their child or children to college was as consequential on the housing or labor market in causing the housing recession, the report does claim to show a direct contribution.
“The findings expose a heretofore unexplored role that higher education costs may have had on household financial risk and resultant foreclosures,” the report said. “This research also suggests that educational expenses may explain why some families with children were more likely to experience foreclosure during the Great Recession than childless households. While the foreclosure literature has focused on subprime lending, unemployment, and house prices as the primary sources of financial overextension, there has been little attention devoted to the cost of college, despite evidence that college is a source of financial stress. Our findings do not suggest that households’ decisions to send children to college were as consequential as housing or labor market dynamics in shaping the Great Recession, but it remains important to understand all contributors to the crisis, especially because the penalties of foreclosure can be substantial and lasting.”
The study intends to illuminate the financial burden of higher education, particularly during a time of extreme economic instability. Faber and Rich state that while subprime mortgage lending and unemployment rates were largely and indisputably responsible for the barrage of foreclosures during the housing crisis, additional sources of “financial risk” had a definite effect on the exacerbation of the crisis.
“Finally, concern over the link between college expenditure and foreclosures should not be limited to the parents who lost their homes during the Great Recession,” Faber and Rich state in conclusion. “Indeed, one of the key lessons of the Great Recession—often vocalized by those who admonish the irresponsible debt accumulation of low-income homeowners or the predatory lending practices of mortgage agents and financiers—is that in our intertwined society, risky behavior affects us all. The consequences of financial troubles can ripple across the economy, leading to loss in property values and jobs. 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.”
Read the full findings here [4].