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An untold story of the foreclosure crisis: college costs

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Lindsey Hadlock

New research is shedding light on a little-known factor in the Great Recession: its link to higher education.

“The Great Recession pulled back a curtain on various sources of financial risk and an increasing reliance on credit across the income distribution,” writes Peter Rich, Cornell assistant professor of policy analysis and management, and New York University’s Jacob Faber in “Financially Overextended: College Attendance as a Contributor to Foreclosures During the Great Recession,” published in Demography in Aug. 7. “We investigated a potential source of family financial overextension: the cost of sending children to college.”

From 2007 through 2009, the United States experienced the largest economic downturn since the Great Depression, made distinctive by a spike in foreclosures and an ensuing housing crisis spurred by an abundance of risky subprime loans in the early 2000s that left many households financially overextended and unable to cover mortgage payments.

This economic slowdown grew beyond the scope of subprime lending as unemployment soared, consumer spending tightened, the stock market plummeted and house prices dwindled – producing substantial financial duress to households across the country.

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 – including for parents with children in college who suddenly found themselves financially overextended and vulnerable to foreclosure as the economy contracted.

“We found that the rate of foreclosures in metropolitan areas across the country increased in the year immediately after college attendance increased,” Rich said. “We estimate that a 1 percent increase in college attendance among 19-year-olds from median-income households nationally was associated with roughly 19,000 additional foreclosures in the following year after accounting for housing and job market dynamics.”

Additionally, the authors find that a connection between college attendance and foreclosures among people of all incomes indicates the trend toward a sliding-scale system of college costs – in which colleges adjust the sticker price with grants, financial aid and other tuition offsets – still leaves a large cost remainder that many families find difficult to cover with income and savings alone.

“The findings expose an unexplored role that higher education costs may have had on household financial risk and resultant foreclosures,” they write. “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.”

According to Rich and Faber, these foreclosures are in excess of those explained by subprime lending and unemployment, with the analysis also accounting for other changes in economic, demographic and housing conditions, as well as state-level changes in tuition and student debt accumulation. They also used three independent data sets tracking individual households over time – the Panel Study of Income Dynamics, the National Longitudinal Survey of Youth-1979 and the American Housing Survey – to confirm the connection between college attendance and foreclosure.

The researchers highlight that even with sliding-scale tuition adjustments, the cost of college and the “expected family contribution” remain a costly source of financial stress. Parents use savings, earnings and loans – even borrowing against their home mortgages – to help pay for these costs. Thus, the burden of college attendance costs put some parents in a severe financial bind during the Great Recession, exacerbating the foreclosure crisis.

Rich and Faber’s research is a cautionary warning to parents and policy experts in the hope that greater understanding of the crisis will help prevent families falling into similar financial abysses.

“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 that can overextend families and render us all vulnerable to future crises,” they write.

Stephen D’Angelo is an associate director of communications in the College of Human Ecology.