Gene Amromin, Chicago Fed

"Passing the Buck: Liquidity, Student Loans, and Who Pays for College"


The flow of new student loans increased by 50% between 2007 and 2010, when credit markets were disrupted and home prices fell by a third nationwide. We study whether these facts are related. Using survey and credit bureau data, we find that erosion in parents’ home equity shifted both the financial and real cost of college enrollment to the student. These students carry more student debt, are more likely to work in college, and less likely to have a home or car in early adulthood, although their enrollment decision itself is unaffected. Parents unable to extract home equity spend relatively less on education and accumulate more non-housing wealth. We find no evidence that parents reverse these flows once their home equity wealth rebounds. Since enrollment is unaffected, these findings demonstrate that liquidity partly determines which family members bear the cost of education. This suggests current student loan policy, which directs liquid education financing to students as opposed to parents, may be tilting the obligation of paying for college to younger generations.

Joint with Jan Eberly and John Mondragon

Contact person: Emiliano Santoro