Another consequence of high college costs: Foreclosure

A new study suggests that high college costs may have exacerbated the foreclosure crisis.

  • By Jillian Berman,
  • MarketWatch
  • Economic Insight
  • Financial Planning
  • Economic Insight
  • Financial Planning
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The high cost of college may have exacerbated the foreclosure crisis.

That's according to a study published earlier this week in the journal Demography. The study from researchers at New York University and Cornell University found that between 2005 and 2011 a 1% increase in college attendance among 19-year-olds from median-income households correlated with 19,000 additional foreclosures the following year.

"College expenses are so high that some families are finding creative ways to make ends meet," said Peter Rich, a professor of policy analysis and management at Cornell and one of the authors of the study. "When the economy contracts that can really make them vulnerable and financially overextended," he said.

The study adds another dimension to the large body of evidence indicating that high college costs are affecting family finances and the economy more broadly. The high levels of student debt families often have to assume to afford college is delaying homeownership among young people, changing the calculus of retirement among baby boomers and exacerbating the racial and gender wealth gaps, other research indicates.

The latest study also suggests that growing college costs may have played a role in one of the most devastating financial events in recent memory: The foreclosure crisis. After accounting for the increase in subprime lending and the depressed labor market during the study period, the researchers found there were still additional foreclosures taking place and their data indicates those are related to families stretching financially to afford colleges.

They speculate the stretching happens in two ways, Rich said. Some families may have leveraged their home equity to help pay for college and, when the economy contracted, they couldn't afford their payments any longer. In other cases, families, faced with the choice of making a mortgage payment or a tuition payment during tough economic times may have prioritized the tuition payment.

"Some may have chosen were going to send our child to college, that's more important," Rich said.

The study offers insights for the ways both policy makers and individual families approach the college cost conundrum. On the policy side, the findings suggest lawmakers and higher education leaders should consider doing what they can to lessen the burden of college costs on families. On the individual level, the research indicates families should approach leveraging their home equity to pay for college with some caution, Rich said.

"Like with any kind of investment or use of credit that makes them more vulnerable," he said.

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