High tuition made the foreclosure crisis worse. How to lower your risk

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High tuition made the foreclosure crisis worse. How to lower your risk

Paying for college could put families at risk of losing their homes. Research published in the Demography Journal found evidence that parents sending their kids to college made the foreclosure crisis worse during the Great Recession.

Peter Rich, an assistant professor of policy analysis and management at Cornell University, believes many parents took out loans against the value of their homes to help cover the cost of college. Home equity loan volume grew rapidly up in the years leading up to the Great Recession. (Want to survive the next recession? Consider one of these fast-growing careers.)

"In the early 2000s, the housing boom provided this growth in equity and so parents were leveraging that," Rich said. "Then, as the economy contracted, many people lost jobs and also revenue went down, and because of all these interrelated factors what most likely happened is some parents who leveraged their homes suddenly could no longer pay their mortgages on higher interest rates."

These families didn't plan for how a downturn could affect their ability to pay both college tuition and a mortgage.

Sean Moore, a certified financial planner and founder of Smart College Planning, saw the foreclosure crisis firsthand in Florida. The stigma against foreclosure went away as the crisis got worse, he said.

"If you've got to choose which bills to pay, especially in the throes of a crisis, I can absolutely see a parent choosing college over the mortgage payment," he said.

The risk of college attendance

The study by Rich and Jacob Faber of New York University found the odds of foreclosure for homeowners who sent their children to college were two times higher than for homeowners without college-age children. They also found an increase in college attendance in one year likely led to thousands of additional foreclosures in the following year.

Among causes for the foreclosure crisis, college attendance was nowhere near as big as subprime lending or unemployment, but the impact was significant. Rich and Faber also looked at the opposite possibility, that foreclosures may have led to an increase in college attendance, but found attendance was actually more likely to decrease in the year after a foreclosure.

What can parents do?

The research has at least one clear implication: College is really expensive. While many schools offer families financial help, the study suggests the gap is still too big for many families, Rich said.

One lesson from the recession is that the housing market is unpredictable, so parents should be cautious about relying on home equity loans to pay for college.

"Leveraging home equity to cover such a large expense like college incurs risk," Rich said. "I would suggest that parents should consider relying more on student loans or other potential sources of financial aid so they're not dependent on the housing market and employment to continue rising."

Homeowners may have gotten the message. Home equity loan volume has dropped since the Recession, perhaps because of more government oversight.

Moore constantly tells parents to know what they're getting into when it comes to paying for college. Instead of waiting until their students start applying, they should look at college costs as soon as they start high school. Waiting until the last minute could be risky.

"Learn what you don't know and learn it as early as you can, because the more preparation you have, the better chance you have of making a sound financial decision," he said.

Families who plan ahead of time have more of a chance to save up, Moore said. This gives them more of a cushion in the event of a downturn. Parents should also look into state programs that may allow students to attend local colleges at a discount or even free. They can also use education-specific 529 savings plans. (Read about the terms, conditions and tax breaks for 529 plans in your state.)

"It can be done," Moore said. "Unfortunately parents get so overwhelmed by the cost, they take a step back or don't do anything. They know it's going to be expensive, but their focus is elsewhere and all of a sudden their student starts applying to colleges and that's when the reality hits."

Image: jacoblund