As home values fluctuate, so too does a family's ability to borrow money to pay for school
The housing market’s boom from the late-1990s to the mid-2000s set up an epic crumble at the end of the decade, but it also might have helped put a lot more kids in college—depending on where they lived.
New research from Cornell University economist Michael F. Lovenheim explores how rising home values enabled families – especially lower income families – to borrow against home values to fund their kids’ college educations.
“In a lot of ways it made a lot of financial sense,” Lovenheim says. “It’s a cheap loan.”
Median home prices increased 55 percent between 1990 and 2005. As a percent of personal income, the amount of equity in homes rose by more than 600 percent in that time, which enabled a lot of people to leverage loans. Lovenheim estimates that the housing boom increased college enrollment by 8 percent nationwide.
But because the market boomed in different ways in different places, the effect on individual families varied dramatically.
“Places like Florida have had huge price variations, so they should see more of an impact than places like Texas, where the variations haven’t been as extreme,” Lovenheim says.
Between 1998 and 2001, Miami and Dallas saw their average home prices increase by 21 percent and 20 percent, respectively. But between 2002 and 2005, Miami’s increase was 70 percent, while Dallas saw only a 9 percent uptick. The resulting differences in home values make it much more likely that families in Miami would be borrowing against their homes to send their kids to college.
Lovenheim found that a $10,000 increase in housing wealth during the 2000s increased the likelihood of college attendance by about 1.37 percent.
For households with income below $70,000 per year, Lovenheim finds that an increase in housing wealth has an even greater impact on the likelihood of college attendance. For every $10,000 of additional home value, he estimates a 13.8 percent increase in enrollment. At the state level, the trend shows enrollment increasing as prices rise.
But because the housing boom eventually turned into a bust, Lovenheim expects to see college enrollment drop, especially in areas hard hit by the downturn.
“I would expect that in places like Florida and Las Vegas, there would be fewer people enrolling in college,” Lovenheim says. “These families are now poorer.”
Housing wealth is no longer included in the government’s student financial aid considerations, which is good for students in a boom, but maybe not so good in a bust. The fact that a prospective college student’s family home in Stockton, California has been foreclosed on wouldn’t be considered as indicative of that student’s financial need. And in the same way, another student from San Francisco wouldn’t be limited from receiving aid simply because his or her parents own a house that's worth a fortune (and that it’s able to provide a ton of equity for a student loan). Lovenheim argues that the government should think more carefully about how wealth, equity, and the tumult of the economy can severely impact poorer families’ ability to send their kids to college.
“From a long-run perspective, we need more highly educated workers,” he says. “Limiting the ability of people to go to college can have long-term implications.”
Lovenheim’s article, “The Effect of Liquid Housing Wealth on College Enrollment,” appears in the October issue of the Journal of Labor Economics.