Are Homeowners Overextended With Kids’ College Costs?

August 14, 2018

The wave of foreclosures during the Great Recession was blamed on rising unemployment and subprime loans. But a new research study by Jacob W. Faber and Peter M. Rich suggests the foreclosure fallout may have been from something more: Homeowners who overextended themselves financially by paying for their children’s college education.

Student studying in dorm room

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“Our findings uncover a previously overlooked dimension of the foreclosure crisis, and highlight mortgage insecurity as an inadvertent consequence of parental investment in higher education,” the researchers note.

Researchers found that an increasing rate of college attendance could be used to predict increases in the rate of foreclosures during the Great Recession. Families with children were more likely to experience foreclosure during the Great Recession than childless households.

Parents often draw from savings, earnings, and loans to cover college costs. Some financial advisers may even recommend parents borrow against their homes. From 2007 to 2009, the U.S. experienced an economic downturn in which foreclosures soared and home prices plummeted.

“While the foreclosure literature has focused on subprime lending, unemployment, and housing prices as the primary sources of financial overextension, there has been little attention devoted to the cost of college, despite evidence that college is a source of financial stress,” the researchers write.

They note that the study shows even “nonpoor households” can be vulnerable to foreclosure. Further, foreclosure prevention efforts may need to be targeted beyond mortgage terms toward a broader range of financial burdens.

“This warrants policy attention not only to risky home lending but also to other detriments of financial hazard—such as the cost of college attendance—that can overextend families and render us all vulnerable to future economic crisis,” researchers note.