August 16, 2012
As if the aftershocks of the 2008 housing crisis hadn’t already been reverberating loudly across college campuses, a growing body of research now finds that the meltdown is forcing higher income families onto financial aid – and causing some students to stop applying to their dream schools altogether.
Parents writing tuition checks for the upcoming fall semester are not only coping with loads of new debt, but more than the cost of a degree is being shifted onto their children. This cycle sparked by the housing bust, if not stopped, threatens to stunt the growth of the broader economy over time.
“Fewer students are going to attend college, and [when they do go,] they’re going to lower quality and less selective schools,” said Michael Lovenheim, a Cornell University economist who is researching the connection between the swing in home values and higher education. “Anything that happens to reduce our supply of high-skilled labor is problematic in the long run.”
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Wall Street analysts are just now beginning to see housing prices improve, with Bank of America Merrill Lynch issuing a client note Wednesday projecting a recovery that’s “likely to be gradual and bumpy over this year and next.” Political leaders often talk about the relationship between housing – about 20 percent of the economy – and job creation, but the result for many families is that the heady promise of college has now evolved into an IOU.
"Because of upside-down mortgages and strained family budgets, students appear to be shouldering more educational expenses than before," Rohit Chopra, the Consumer Financial Protection Bureau’s student loan ombudsman, told The Fiscal Times.
In testimony before the Senate Banking Committee last month, Chopra suggested this could start a vicious cycle that could limit the extent to which home values rebound. The elevated levels of student debt make it tougher for graduates to save for down payments, restricting the pool of homebuyers and, thus, prices. “Will these honest borrowers be precluded from reaching the economic milestones familiar to American life?” he asked in his prepared remarks.
The number of households with annual incomes above $100,000 applying for financial aid has increased to 72 percent this year from 59 percent in 2008, according to a recent survey commissioned by the student loan provider Sallie Mae. This shift tracks with the decline in home values.
About 85 percent of all college attendees come from families that own their own homes, according to Census statistics. And 23.7 percent of all mortgages, or 11.4 million households, are under water, according to the data firm CoreLogic.
Depressed housing values have constrained the wealth of families and their ability to obtain credit in conventional ways, making federally sponsored loans for parents and students an essential option. Home equity lines of credit – which some families use to finance college – have fallen by $259.3 billion, or 20 percent, since 2007, according to the Federal Reserve.
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Mark Kantrowitz, publisher of FinAid.org and Fastweb.com, said his surveys show college has become more of a consumer choice since the housing crash. Outstanding student debt recently topped $1 trillion, making it second only to mortgage debt, according to the CFPB. When students choose between enrolling in a more prestigious institution or a lower-rung school, the cost of that school – now, more often than before – shapes their decision. They’ll pick the better college if the net prices are within $1,000 or each other, but they’ll go with the lesser school if the difference is more than $5,000.
“For the first time, applicants are not going to their first choice because of affordability, rather than not getting in,” Kantrowitz said.
That lines up with research by Cornell’s Lovenheim. In a new working paper co-written with Kent State University professor Lockwood Reynolds, Loveheim found that increases in housing wealth improved the chances a high school student would apply to a flagship public university and complete college.
The analysis builds on an earlier 2011 paper by Lovenheim that showed the average increase of $57,965 in home values from 2001 to 2005 led to a 7.91 percent jump in college attendance during that period. “When the housing boom came in, it was the source of cheap and easy credit,” he said. “I think about it almost like winning the lottery. You had access to a liquid form of wealth.”
Now that the pendulum has swung in the opposite direction, families that are better off are more likely to finance degrees through debt, while those considered middle class might avoid the degrees altogether.
“My estimates suggest that should have an effect on whether kids go to college, an effect magnified for households making less than $70,000 a year,” Lovenheim said. “They’re not so high income that it doesn’t matter what the price of college is. They don’t have enough.”