The Impact of Parental Wealth on College Degree Attainment: Evidence from the Housing Boom and Bust

The past few decades have witnessed the emergence of substantial increases in both the costs of and returns to college, which have increased the demand for credit beyond the supply available from government programs. A long-standing policy goal of financial aid is to narrow, if not close, the parental income gap in children’s subsequent educational attainment. Education is widely touted as the engine that leads to socioeconomic mobility, and equitable access to higher education the key to that ignition, in order to compress the rungs on the nation’s economic ladder. However, recent studies document growing parental socioecononomic status gaps in college entry, persistence, and graduation, and the college completion gap between children from highand low-income families has grown by about 50 percent since the late 1980s (Bailey and Dynarski 2011). While more students are going to college than ever before, and the returns to college quality are arguably as high as they have ever been, currently only slightly more than half of those who begin college obtain a college degree within six years. College dropout rates are particularly high among black and Latino students and first-generation college goers. There remains considerable, spirited debate in the literature about whether the observed correlation between parental income/wealth and educational attainment has any causal element and about the existence of financial constraints affecting postsecondary education decisions (Bound, Lovenheim, and Turner 2010). There exist differing interpretations of this empirical connection between parental wealth and schooling and the nature of this relationship, as some argue it is simply a reflection that higher income families place greater value on education. Yet, even after controlling for cognitive ability and family background, there exists a 30 percentage point difference in college attendance rates between children from families from the top parental income and wealth quartiles compared with those from the bottom quartiles (Lochner and Monge-Naranjo 2011). Large differences in college completion by parental income among those with similar test scores and the greater sensitivity of low-income youth to tuition differences are at least consistent with borrowing constraints. Although a voluminous body of research has investigated the effects of changes in financial aid policy and parental economic resources on children’s postsecondary outcomes, this literature has largely overlooked the importance of wealth shocks arising from the housing market (Lovenheim 2011 and Charles, Hurst, and Notowidigdo 2018 are notable exceptions). Housing wealth has become an increasingly important component of the college enrollment decision over the past 20 years. In particular, there has been a marked increase in the preponderance of parents refinancing their homes in the years immediately preceding their children reaching college age. This behavioral response by parents is driven by the need to help finance higher education expenses amid rising college tuitions. Eighty-five percent of college attendees come from families who own a home, and those whose children are enrolled in college are