According to a Cornell University study, the plummeting value of homes is having an adverse affect on the number of students that are heading off to college. The head of the study, economist Michael Lovenheim, found that the steady decline of housing prices is reducing the overall wealth of parents, which is also prohibiting parents from paying for the college education of their children.
Even those students that are still attending college in the face of a housing bust and with less money to work with, are having to make a change to their original educational plans.
When housing values were up, parents were accessing the equity they had built in their home to access the cash they needed to pay for a college education for their children. Accessing the equity in the home was a fast and easy way for parents to obtain the cash they needed to pay for the college education, using a low interest rate equity line or loan, and a tax-deductible way to send their child off to earn a college degree.
Housing Prices Rise, Enrollment Increases
According to the study, from the 1990s to 2003, the prices of houses steadily increased on an annual basis. The increasing values of homes provided parents with access to the equity they had built in the home to use as the means to pay the tuition, room and board, and book fees to send their children off to college. This access to cash from the increased value of the home alleviated the need for taking out student loans, depleting cash savings or having to cash out retirement accounts—and taking tax penalties—for funding college educations.
The proof is in the numbers.
- Between 2001 and 2005, when home prices skyrocketed, college attendance rose by 8 percent
- For every $10,000 more that the home value increased, there was a 13.8 percent higher chance that the child would attend college
- According to a University of Michigan study, 64 percent of the children of homeowners were likely to go to college, while only 33 percent of renters were likely to go to college
Lower Housing Prices, Higher Student Loan Default Rates
The study also reveals that as housing prices fell, not only did it decrease the attendance numbers at colleges and universities around the country, but those who attended college were forced to turn to alternative payment methods, such as taking out student loans.
According to the U.S. Department of Education, 4.5 percent of borrowers were in default on their student loans in 2003. In 2009, the number of borrowers in default on their student loans has increased to 8.8 percent.
Alternative Educational Choices
The study reveals that Americans are $7 trillion less wealthy since the housing boom went into a housing bust, which is a 16 percent loss in household wealth. This equates to a reduction in housing values of approximately 32 percent since 2006, as far as the S&P/Case-Shiller Home Price Indices reports. According to Lovenheim, this may not deter students from heading off to college, but it may throw a wrench in their original plans. Those students who intended on going straight to a four-year university program may have to start at a two-year program at a community college instead.
In a previous study conducted by Lovenheim, for every $10,000 in value that the home fell, 2.3 percent of students were less likely to attend a major university and 1.6 percent were less likely to attend a community college.
Those most affected by the decrease in housing values and the change in college attendance are low- to middle-income families. The average household income is $75,000, and even of these households, minority households, such as African-American and Hispanic households are the most affected.
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It’s no secret that the dollar doesn’t go as far as it used to, which means luxuries must often go by the wayside. But what is considered a luxury? Prior to 2008 getting a college degree, for example, was as common for the middle class as going to high school. But now that the middle class struggles to keep a foothold on the center rungs of the economic ladder, college suddenly appears to be about as attainable as booking a trip on the Space Shuttle.
Unfortunately, the cost of a four-year college degree has risen 600 percent since 1980, which has lead to a staggering result: Currently two-thirds of all college graduates have student loan debt when they receive their degrees—roughly to the tune of $24,000 (on average).
This begs the question, is the cost of a college degree worth it in this economy? To answer that you have to ascertain what a college degree will get you over the long haul. Consider that even though the overall unemployment rate in America is just under 10 percent, it’s only 4.3 percent for college graduates. And over a lifetime college graduates make considerably more than those who never obtained a college degree at all. That alone seems like a good reason to go to college.
But what about all that debt? On average it now takes a recent college grad at least year to find a career-oriented job that pays a reasonable wage. But if a person is forced to take out loans to pay for college, how will they make the loan payments if they can’t find a job right away? With college debt now over $800 billion and growing, it surpasses credit card debt as the largest financial sinkhole in America.
According to the website The Project on Student Debt (which is an initiative of The Institute for College Access and Success) taking out student loans to pay for college is not a bad idea IF you engage in the right kind of loans. Federal student loans are legitimate forms of financial aid; private (bank) loans are not.
Not All Student Loans Are Created Equal
Turns out private loans are the biggest credit risks to students and should be avoided at all costs. If the only way you can go to college right now is to take out private loans, then you should probably put college on hold and work for a while to save up. A private college loan with a bank is no different than a credit card, which means they (the banks) solely dictate your interest rate, your payments, and payment schedule. Typically these loans are uncapped and cannot be erased by bankruptcy. This debt will follow you around FOREVER, wreaking havoc with your credit score, which can prevent you from starting a business, buying (or renting) property, or even getting a job (many HR departments use applicants’ personal credit scores in the vetting process). Is a college degree worth all that stress? Not likely.
A federal student loan, however, is designed to be manageable (and the application is easy). They’re backed by the Federal Government and controlled by Congress (not a bank’s board of directors). Therefore, the purveyors of these loans make every effort to work with you on repayment. For example, federal student loans are unemployment deferred (meaning you don’t make payments unless you have a job), the size and frequency of your payment is based on your household income, and if you become disabled, die, or the school you’re attending ceases to exist, then the loan is cancelled. Plus, they can be forgiven in exchange for certain types of community service. And if you’ve consistently paid on the loan, the remaining balance will be forgiven after 25 years.
What Can Colleges Do to Help Students Avoid Bad Debt?
According to The Project on Student Debt, colleges and universities are taking a more proactive role in counseling students on the riskier aspects of private college loans. Financial aid offices already talk up the benefits of federal student loans, however, they seldom mention anything about the pitfalls of private loans. Some schools have even gone so far as to require financial aid counseling for any student who does not pay cash for their education. And many colleges’ financial aid offices are coordinating with other colleges to employ common debt-avoidance practices, which includes monitoring cashier and bursar offices to track incoming private loan tuition payments so that the financial aid office may counsel students on managing debt before it gets out of control.
Plus, as of October, 2011, the federal government will require all U.S. colleges and universities to provide online “net price calculators” to help students and their families figure out how they’re going to pay for college, taking into consideration exactly how much long-term college debt they can handle.
The sad truth is not many people can afford to pay for college now, which means they either have to get scholarships or take out loans. But with fewer scholarships being handed out, loans have become the go-to solution for most co-eds. This is okay, as long as you borrow wisely and from the right lending institutions. With a little bit of effort you can avoid graduating with that dreaded debt monkey on your back.
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It is the time of year when student loan and grant refunds are issued. Most students will receive refunds worth hundreds of dollars. Here are 10 suggestions on how to responsibly spend yours.
- Keep it in your college. Student refunds are automatically mailed out to the student. But you don’t have to have it this way. Call up your financial aid office or college business office and ask that your refund stay there. By doing this you have a head start on paying for next semester’s classes and course materials.
- Pay on your student loans. You can use your refund towards paying on your student loans. This is a pain free way to keep down the interest rates.
- Donate it to your college or university. Show your school spirit while helping others. Don’t forget, charitable donations are a tax write off.
- Help someone less fortunate. Donate you refund to your favorite charity. You will be rewarded with that great feeling that you have helped someone in need.
- Adopt a pet from a shelter. Now that school is out, you will have extra time on your hands. Why not make a new friend to share that time with you? Shelter animals are often healthier (in the long run) than those brought from animal farms where they suffer conditions caused by too much inbreeding.
- Plant a vegetable garden. You will get plenty of exercise, fresh air and sunshine. You’ll save hundreds on your grocery bill by eating the vegetables you grew yourself. An added bonus: homegrown vegetables are healthier than those you buy in supermarkets.
- Tune up your car. Regular tune ups keep your car running in optimal condition. Finely tuned cars take less gas, resulting in higher gas mileage. This adds up to lower gas bills for you and a healthier ozone layer.
- Buy U.S. Savings Bonds. Bonds mature at a slower rate than some other investments but, they are safe investments. You don’t need a financial adviser or be investment savvy to buy bonds.
- Buy career essentials. Invest your refund on the necessities you will need to be successful in business. Things to invest in include: professional wardrobe, iphones, computer software and business cards.
- Get some rest and relaxation. The proper balance of mind, spirit and body is essential for success. Don’t feel guilty about a day at a spa, a massage, or a day at the beach.
To find your local aspca to adopt a pet:
To find our more about student loans visit salliemae.org.