Ebook The Effect of Liquid Housing Wealth on College Enrollment
Whether family resources and financial constraints affect higher education investment decisions is an important empirical question in economics. The relevance of this question is underscored by the large differences across the income distribution in post secondary enrollment. For example, between 2000 and 2005, the college attendance rate among college-age individuals in the lowest income quartile in the Current Population Survey (CPS) was 33.3%, while among those in the highest income quartile the attendance rate was 75.5%. Differences across the income distribution in college enrollment can be attributed in varying degrees to binding short-run credit constraints, differences in college preparation that are correlated with income, and a wealth effect whereby higher income families consume more higher education. As the differences in college investment across the income distribution may not be indicative of a causal role for family finances, it is important to identify whether family resources have a causal effect on the decision to invest in a higher education.
Because of the importance of supplying skilled labor to the workforce, the growing cost of obtaining a college degree, and the persistently high returns to investing in college, there is a large literature on the relevance of family income in determining college enrollment. In the classical models of education investment that assume perfect access to capital markets, individuals invest in higher education until their internal rate of return equals the market rate of return to the investment (Becker, 1962; Ben-Porath, 1967; Mincer, 1958). Because the optimal educational investment decision should be independent of family resources absent liquidity constraints and wealth effects, much of this literature focuses on the positive correlation between income and schooling, typically interpreting a positive income gradient as evidence of short-run credit constraints (e.g., Ellwood and Kane, 2000).
This interpretation of the positive income gradient in collegiate attainment is confounded by the strong association between student ability and family resources; con-trolling for ability measures significantly reduces the enrollment gap between higher and lower income households (Carneiro and Heckman, 2002; Cameron and Heckman, 1998 and 2001). For example, after controlling for AFQT quartile, Carneiro and Heckman (2002) find only a weak relationship between income and educational attainment. The authors argue from these results that short-run credit constraints influence college enrollment less than the long-run access to resources that is reflected in high school test scores and ability measures. In work using more recent data, however, Belley and Lochner (2007) find a stronger relationship between family income and children’s educational attainment, suggesting income is becoming increasingly important for explaining teenagers’ college attendance decisions.
The previous literature has focused almost exclusively on the role of family income rather than on the importance of total family resources in influencing college investment decisions. The main reason for this focus is the lack of wealth information in the data sets researchers have used, but if families use both income and wealth to pay for college, excluding wealth will cause one to mis-measure the empirical relevance of household finances. Even if wealth measures are available, however, identifying the causal effect of wealth on college enrollment is difficult because families that accumulate more wealth typically are more likely to send their children to college due to unobservable attributes that are correlated both with savings behavior and education, such as child ability and preferences for education.
This paper adds to existing work on the role of parental resources in college attendance decisions by examining the relationship between family housing wealth and post secondary enrollment, which has received little previous attention. The analysis makes contributions to two different areas of research. First, rather than assuming family resources are exogenous conditional on family characteristics and measured student ability, I use the timing and geographic differences in the magnitude of the recent housing boom to generate exogenous variation in wealth to homeowners. By identifying the effect of household wealth on college enrollment, my estimates shed new light on the importance of family resources for higher education investment decisions. Second, given the large fluctuations in the housing market over the previous decade, including an unprecedented boom followed by a precipitous and sustained decline since 2006, identifying the effect of housing wealth on household decisions is of substantial policy interest in its own right. This analysis contributes to the growing work indicating the importance of housing wealth for various types of household behaviors; my estimates imply a sizable effect on college-going behavior, particularly for middle class families, from the large recent variation in home prices in the United States.
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