Panel Paper: Impact of Parental Wealth On College Enrollment and Attainment: Evidence From Housing Boom and Bust

Friday, November 9, 2012 : 10:05 AM
Salon E (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Rucker Johnson, University of California, Berkeley

A long-standing policy goal of aid is to narrow the parental income gap in children’s subsequent educational attainment. Recent research indicates that credit constraints have played a larger role in college enrollment and completion rates over the past 15-20 years (Lochner and Monge-Naranjo, 2011; Lovenheim, 2011). Housing wealth has become an increasingly important component of the college enrollment decision over the past 15 years (Bound et al., 2010).

This study provides new evidence on the impact of parental wealth on educational attainment. In order to address the endogeneity of parental wealth, the empirical strategy analyzes parental housing wealth changes induced by local housing booms and the subsequent housing bust. Using data from the Panel Study of Income Dynamics (1968-2009) linked to MSA housing price data from the Federal Housing Finance Agency, I examine how changes in parental housing equity in the four years prior to their child being college-age affect the likelihood that the child attends college and where they attend (2-year vs. 4-year; in-state vs out-of-state; college quality). This provides a test of the role of parental wealth (and potential credit constraints) in influencing post-secondary decisions, including if, when, and where individuals attend and complete college.

The research design exploits the timing and geographic dispersion of the housing boom (late 1990s-2005) and housing bust (2007-2009) to generate exogenous parental housing wealth variation. Quasi-experimental evidence from the housing boom and bust show that families that experienced significant increase in home value during the housing boom had a much easier time financing college expenditures due to increased ease of borrowing against their home value; the contrast with the housing bust of 2007-2009 period is stark.

The findings indicate that housing price-induced shocks to parental wealth (during ages 13-17) had significant impacts on the probability of college attendance and college completion. Among those who attended college, housing price-induced shocks are shown to significantly affect the probability of attending a community college, attending an in-state college, indicators of college quality, college tuition, and the SES & racial composition of students at the college they attend. There is also evidence that suggests the impacts of housing booms and busts on these post-secondary outcomes are asymmetric, with larger educational impacts experienced for housing market downturns. These post-secondary education effects of housing price shocks are concentrated among children whose parents are homeowners with no estimated impacts on renters. The effects are more pronounced for children from families with relatively lower income, and it appears that higher initial parental wealth measured acts to cushion the impact of unanticipated housing market shocks on children’s subsequent postsecondary education outcomes.

The results suggest that binding credit constraints affect both the extensive and intensive margin of college enrollment. The findings indicate that the housing market downturn that accompanied the Great Recession led to a reduction in the quality of colleges attended by students, particularly those from lower-income families. This work underscores the need for policies to insulate the training of high-skilled labor from impacts of economic downturns and housing price volatility.