Falling home values and the college tuition crunch

Of course, colleges and universities could always cut tuition payments, but fat chance of that.

Sorry to sound rude, but the more I read this blog, the less I think you understand basic economics. Colleges are free to charge any amount they wish, as long as they are content with having no students.

Tuition has gone up for the same reason that house prices went up: cheap credit betting on ever-increasing home prices. That is, the price of a good goes up in direct relationship to the amount of money chasing it. Colleges were awash in cash from parents' home equity loans and second mortgages, and that's why they felt free to raise their prices far faster than the rate of inflation, and far above any justifiable cost or added value. The party is over, and the colleges will have to get used to life without the punchbowl, too.

I bet that when push comes to shove, universities will suddenly be willing to lower their sticker price (or increase their scholarship grants) once they start to see plummeting enrollment. After all, some income is better than no income.

Maybe this means that parents will no longer be expected to run up their debt in order to get their kids a college education.

I have come across 4 or 5 homeowners that were selling their homes so that they could pay for their kids' tuition. In all instances, the youngest child was finally out of the house and the parents were selling to pay for college. Some were buying in condos in an adjacent town that was less expensive, some were renting.

That is sad, but today's reality.

Scott - You really need to mellow out and get hold of yourself. The current real estate situation does not effect everybody equally, and home values " having fallen off a cliff" is totally inaccurate.
Sam average homeowner who bought a home in 1992 to raise his children . Is seeing an over 100 % increase in value even in todays market place. Sam is the guy likely looking for the equity loan. These loans are readily available as Sam has been responsible with his finances. .
The current real estate situation is largely effecting those who have not been responsible. Life goes on as usual for the vast majority.

A college education is an asset. And like so many other assets (think housing), easy access to credit caused tuitions to rise much faster than incomes. Inevitably, this trend will reverse course. One way or another, tuition prices and/or enrollments will come down. This will result in severe financial hardships for many colleges.

The situation facing colleges is similar to the one facing the US automakers. For years, both relied on absurd growth projections to gauge capacity requirements. They also made huge investments to cater to the now defunct “mass luxury” market-- a market that was only made possible by consumers having access to easy credit. The investments made by both increased overhead costs immensely. For automakers, the mistake was designing inflexible factories around expensive SUVs instead of around economy cars. For colleges, it was abandoning cost-effective education and instead building luxury dorms, campus centers, and sports fields with the assumption that students would pay a high premium for “lifestyle”. But as consumers can no longer afford mass luxury products, their priorities are shifting and they are cutting back. Demand for mass luxury goods is shrinking. This is bad news for industries that cater to this market. Unless they cannot scale back quickly (not likely for colleges or car companies due to the types of investments made) they will buckle under the weight of high overhead costs. Sadly, I predict the story for many colleges and universities will turn out the same way as it has for the US automakers-- bankruptcy, downsizing, and bailout.

A parent mortgaging their house to pay for college is insane. I for one do not plan on doing it for my children, I plan to follow what my parents did for me. They sat me down and explained they thought futher education was important, that meant either a trade school and apprenticship or college. They wanted to help but I had to help myself which meant that they would contribute X amount and co sign loans. I took out loans, filled out scholarship applications and worked and saved my money. They also explained what I would face coming out of school with loans and how it would affect me. I had the option of going to a State School and getting pretty much a free ride or going to a more expensive school and coming out of school with debt. I chose the more expensive school and paid off my 25K debt early by working hard and saving and not shopping high end brands for cloths etc. And at the same time I managed to save for a down payment and bought a condo.

A house is a house and it does provide some financial benefits. But most of its value for me is not in economic terms for me it is about owning something and making it mine and providing safety and security. I don't want to rely on a landlord paying his mortgage so that I can continue to live there and I don't want to rely on him to fix things.

Colleges are going to charge what they can get just like any one with something to sell. What does this mean for tuition, it will probably stagnate for a while to adjust. And I am guessing that some community colleges, and smaller private schools may be seeing a lot of applicants. A big named school does not equal a better education.

At U Mass, tuition is stable and "fees" are raised. Sorry Marcus, most universities and colleges are not lowering tuition. However, they finagle their budgets to give out more need based aid to qualifying families. Unfortunately, this helps the very poor but does not help many who are middle income in this economic downtime. The elite universities will always have 10 times as many applications as available slots because the ivy degree is simply a very scarce and valuable commodity. The very rich can still tap into their home equity since most have not lost their homes, live in Tony areas and probably have preexisting home equity lines of credit that are unaffected by the recession.

"Taking out a home equity line or second mortgage to help pay your kids college education is as American as apple pie."

Really? Many of us have been saving specifically for our childrens' college educations and do not plan to take out second mortgages or home equity lines. We're too old to be thinking about a mortgage! Been there and done that, thank you very much!

For those who can't afford secondary education, universities and colleges are increasing their scholarship funds.

The premise of using a home to finance cars, vacations, weddings, college eduction, you name it . . . have we not learned?

Colleges have suffered loss of endowment in this economic downturn, just as families have experienced diminishing returns on our investments. The cost of providing a first rate education is high. It's hard to cut corners without students and parents noticing the difference.

There has been an increase in applications to state schools. The tuition and room and board is significantly less then private schools, although UMass is suffering some of the same problems as it's private counterparts. A university is a very expensive enterprise. My advice? Start saving when your children are bornincreasing their scholarship funds.

The premise of using a home to finance cars, vacations, weddings, college eduction, you name it . . . have we not learned?

Colleges have suffered loss of endowment in this economic downturn, just as families have experienced diminishing returns on our investments. The cost of providing a first rate education is high. It's hard to cut corners without students and parents noticing the difference.

There has been an increase in applications to state schools. The tuition and room and board is significantly less then private schools, although UMass is suffering some of the same problems as it's private counterparts. A university is a very expensive enterprise. My advice? Start saving when your children are bornincreasing their scholarship funds.

The premise of using a home to finance cars, vacations, weddings, college eduction, you name it . . . have we not learned?

Colleges have suffered loss of endowment in this economic downturn, just as families have experienced diminishing returns on our investments. The cost of providing a first rate education is high. It's hard to cut corners without students and parents noticing the difference.

There has been an increase in applications to state schools. The tuition and room and board is significantly less then private schools, although UMass is suffering some of the same problems as it's private counterparts. A university is a very expensive enterprise. My advice? Start saving when your children are bornincreasing their scholarship funds.

The premise of using a home to finance cars, vacations, weddings, college eduction, you name it . . . have we not learned?

Colleges have suffered loss of endowment in this economic downturn, just as families have experienced diminishing returns on our investments. The cost of providing a first rate education is high. It's hard to cut corners without students and parents noticing the difference.

There has been an increase in applications to state schools. The tuition and room and board is significantly less then private schools, although UMass is suffering some of the same problems as it's private counterparts. A university is a very expensive enterprise. My advice? Start saving when your children are born

#7. Marcus is completely correct. Tuition costs, along with real estate, health care, stocks, etc. were all subject to the same credit induced bubble. Tuition costs like real estate are driven primarily by wages and more importantly credit availability. Wages have been stagnant for years. The only way that tuition could rise was through cheap and easy credit. If the credit is not there, prices fall. It really is basic economics. Tuition costs will not fall over night. It will take time. Colleges will do what they can to keep tuition costs high, but they will fail. It's no different than the governments vain attempt to keep home prices inflated.

Sorry, bostonrunner, if the money isn't there, the tuition will come down. Adding financial aid and jiggling fees is exactly like homebuilders who tried to keep overpriced homes moving by giving away TVs and cars. It doesn't work and eventually prices come down. You can't charge customers more than they can afford to pay once easy credit disappears. Just the way it works.

News Flash Guys:

Higher Education is Heavily SUBSIDIZED. 90% of families could not send their children to college if it were not for Subsidized and Un-subsidized Stafford Loans, Pell Grants, Hope Scholarships, the Lifetime Learning Tax Credit and the list goes on including the tax deductibility of student loan intterest...

What else is Heavily Subsidized? - You guessed it - Housing. Not just any type of housing, Owning a Primary Residence. Renters get screwed. Owning a home is enormously subsidized in the US tax code. Take away all subsidies regarding education and real estate and you will see prices fall. Colleges will have to react to the new reality just like housing prices would have to.

Marcus (#1): Great minds think alike. Good post.

REmaven (#4): I disagree with you: 1) Home prices have fallen off a cliff, 2) “Sam Average Homeowner” is not responsible, and 3) HELOC financing is not readily available for most people. Through the boom years, Sam tapped his equity for that new family room, SUV, and flat screen TV. As a consequence he has very little equity cushion and is therefore not a viable candidate for a HELOC. There is plenty of data to support this by the way-- such as the negative national savings rates in 2006 and 2007 and the current plummeting consumer spending figures. File this one under D for “Duh!” but Americans have been spending way beyond their means. And the chickens are now coming home to roost. One more thing, banks have tightened their requirements on junior financing (HELOCs, 2nd mortgages, etc.) so much these products are on the verge of extinction. Check around... Many banks have dramatically reduced their offerings in these product areas. Some have phased them out entirely.

bostonrunner (#7): Colleges are not lowering tuition yet, but give it time. Eventually tuitions will either be cut or will stay flat while prices on everything else catch up. But I bet we will see outright cuts-- particularly among the middle of the road private schools that compete directly with much lower priced alternatives such as UMASS. State schools like UMASS will be the last ones to cut tuition and fees. They are already cheaper than their competitors and applications are way up as a result. Furthermore, they are supported by state funding which will likely be reduced in the future. They will need to charge students more to make up the difference when this happens. UMASS is still much cheaper than its private competitors so it has a lot of room to raise prices if necessary. But the situation is very different for the second-tier private colleges out there that are already on the expensive side. I think things will get very ugly for many of them soon (see my post above).

I'm curious, Paid of my College Loans: was your major in sciences or mathematics?

Sorry, my post had some problems - yikes! Doesn't anyone @ the Globe review before posting?

It wasn't that long ago that one could work a part time job to put oneself through college. And then, as Renting points out, the government stepped in and started subsidizing higher education and the money started flowing and tuition costs sky rocketed.

Expansion of money and credit (inflation) leads to higher prices. Contraction of money and credit (deflation) leads to lower prices. Econ 101.

any parent needs to learn how to play the college game if they have kids going to school, public or private. The private use equity and 529's against you and most dont know it. The publics are less expensive, but have less grant money as they dont have billion dollar endowments.
if you learn the rules that the colleges play by, private can be less expensive and you can structure it in such a way that you owe less in loans and mortgages when the kids are done. Just learn how to play.

Another argument for house prices to fall further - How are new buyers expected to enter the market when so many people who graduated college in the past 10 years did so >$50,000 in debt? Low interest rates and tax incentives don't do much when you're spending all your excess money on existing debt service, instead of saving up for the now nearly mandatory 20% downpayment.

We are already seeing this effect on colleges. If you look at the latest demographics, you see a big % increase in wealthy kids (despite poorer scores and resume), who can afford the bill. You also see a big % increase in the poor, via scholarships. The kids getting squeezed out are the bright middle class kids. The meritocracy is over, as David Brooks put it in the NYT.
The prior posts are correct, the deflation of the bubble means that parents cannot tap their houses like ATMs to pay for tuition. The total pool of money dries up. This means either tuition comes down or something else has to give. For many colleges, this means they tap into larege endowments (if they have them) or lower academic standards to go for more rich kids.

I agree Kelly, I am there with my wife we graduates with a combined 38k all in Stafford loans which we consolidated at 3% in 2003-2004 which is manageable. Now she is going back to Grad School (Tufts) and its 38k a year for 2 years... We are 28 and 27 and we arent going to be buying a home for prolly 3+ years. I am not worried though because I think that the hosuing will go down further and then go sideways for several years. And if we ever have much higher interest rates like 7-8-9% housing will collapse.

Remember for every 1% increase in Mortgage Rates ona 30 yer mortgage hosuing prices must come down 10% to have the same monthly payment. And its always better to buy a hom ein a high interest rate environment for this very reason and then you can re-finance when rates drop.

Keep waiting!

I am going to tell my three kids not to worry about fancy colleges, No I am teaching them now at a young age to hold signs for politicians. It has worked for many dopes in my neighborhood in Boston. These dopes have gotten jobs paying 50,70,80 grand a year with no experience and huge public pensions. The whole fancy college thing is a farce unless your kid knows what he or she wants; doctor,nurse,pharmacist etc. Otherwise your paying 150k to be a barista living in your parents basement. Nothing is on the level

A few important points that the author of this article and some of the posters may not be aware of:
- Home equity loans aren't always the best way to pay for college. In some cases, a family may pay less for a federally subsidized student loan over the life of the loan than you will with a similarly sized home equity line of credit, even when mortgage tax benefits are counted in. Make sure you are considering all the facts before thinking that home equity loans are the best way to finance your child’s education.
- Many private colleges consider home equity in making financial aid decisions. Thus, if your home equity has lost value, you may now qualify for financial aid, where you didn’t before. In some cases, this aid may be *interest free* such as grants and a work study job for your child.
- Public institutions do not always work out to be the best deal financially. Even in a down economy, private colleges have sizable financial aid budgets, and also offer merit scholarships. More importantly, a number of private colleges guarantee to meet the full demonstrated need of all admitted students, whereas only a small number of public institutions do. Don’t assume that “public is always best!” until you get the facts, and have your financial aid and merit scholarship offers in front of you.