The financial distress caused by college tuition worsened the foreclosure crisis at the heart of the Great Recession.
New research in the journal Demography shows that if you wanted to know where the wave of foreclosures would hit next from 2006 to 2011, you could start by looking for places which had just sent an unusual number of students to college.
Sociologists Jacob Faber of New York University and Peter Rich of Cornell looked at annual changes in college attendance and home foreclosures for 305 broad American metro areas which cover about 85 percent of the population.
If college attendance rose in a certain area -- a year later, the rate of foreclosures did too. The clear implication, Faber said, was “that the strain of paying for college increased foreclosure risk.” Nationwide, they found a one-percent increase in college attendance could be expected to lead to between 11,200 and 27,400 additional foreclosures.
Foreclosure risk jumped most when students came from middle-income households, but surprisingly, even an increase in college attendance among top-earning households would lead to elevated foreclosures.
They found the same relationship in other datasets, including those which followed households over time. For example, the Panel Study of Income Dynamics shows that -- all else being equal -- foreclosure risk doubles after a family sends a child to college.
The relationship also existed in blunt, statewide data. In states where college attendance climbed, foreclosures followed. Everywhere they looked, Faber said, they found “pretty strong evidence that there is a causal relationship.”
To isolate the effect of paying for college, Faber and Rich adjusted for other factors which have been shown to increase foreclosure risk, such as unemployment, mortgage debt, home prices and the overall college-age population.
Previous research has shown that having kids at all boosts your foreclosure risk significantly. It cost an average of $233,610 in to raise a child through age 18, according to 2015 figures from the Agriculture Department.
“In addition to kids being generally expensive, having a kid in college is particularly financially stressful for households,” Faber said. “And that financial stress has led to increased foreclosure risk.”
The nonprofit College Board found the average cost of a four-year education including room and board has more than doubled over the past two decades, even after accounting for inflation. When you consider only tuition and fees, the cost of a public education has jumped threefold over that time.
To be sure, some of that rising tuition is covered by financial aid -- but much of that comes in the form of loans, which only adds to parents’ financial burden.
The increased foreclosure risk across all income groups shows “the gap between the total cost and the financial aid provided may still be too large for many families across the income distribution to bear,” Faber and Rich write.
“Both of these investments, investing in college and investing in home equity, are what we tell everyone are the two most important tools for achieving the American dream,” Faber said.
It’s “really troubling” to find that, together, those milestones cause so much financial stress that they lead to increased foreclosure nationwide, Faber said. As a society, the U.S. has underestimated the full cost of the economy’s transition to jobs that require more education. A higher education is beneficial, he said, but people shouldn’t have to risk their homes just to get one.
“I would never advise against sending a child to college based on this research," Faber said. "A college degree is increasingly valuable -- especially so for individuals least likely to attend.”
In early 2018, Americans owed a grand total of $1.4 trillion in student loans, according to the New York Fed. It wasn’t always that way, but in 2009 and 2010, student loan debt leapfrogged credit cards and auto loans to become U.S. consumers’ largest category of non-housing debt.
Since the Great Recession began, Americans’ overall debt (including mortgages) has grown by about $839 billion. Student-loan debt makes up a fraction of the overall, yet grew by $860 billion over that time. To put it another way, consumer debt would still be below 2007 levels if it weren’t for student loans, even before adjusting for inflation.
Because student loan debt has more than doubled since beginning of the period Faber and Rich studied, U.S. households may be at even greater risk of college-cost-related foreclosure than they were during the crisis.
“It’s a scary thing to think about,” Faber said. “In the next economic downturn, will student debt take the place of subprime lending in the last recession?”