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.

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

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top
×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription