The Housing Crisis and the Rise in Student Loans

The flow of new student loans increased by 50% between 2007 and 2010, and the amount borrowed per student also rose by about a third. This shift occurred during the Financial Crisis, while credit markets were disrupted, and home prices fell by about a third nationwide. In this paper, we explore whether these two phenomena are linked, and in particular, whether the decline in home equity caused households to shift the responsibility for education financing to students in the form of loans. Student loans were one of the few forms of credit that remained accessible throughout the crisis. We estimate that for every dollar of home equity lost, households increase student loan debt by forty to sixty cents. This substitution appears to be driven primarily by households with low levels of liquid assets. We extend our analysis using credit bureau data to trace longer-run effects of this leverage on students. Our results show that constrained households generally continued to enroll in college, but switched to student loan financing. Our quantitative estimates suggest that the 30% average decline in house prices resulted in $1300 in additional student borrowing on average, per student, though the estimated effects are larger for liquidity-constrained and less-educated households. This channel explains 38% of the change in student loan debt within our sample.