How the U.S. Housing Bust Cut College Enrolment and Shaped Careers for a Decade

The European Central Bank, in collaboration with the TBS Business School in Toulouse and supported by the Centre for Economic Policy Research in London, has released a compelling working paper by Anna Pestova and Alexander Popov that examines how the 2008,2011 U.S. housing bust disrupted the traditional relationship between recessions and college enrolment. Historically, downturns in the United States have been accompanied by surges in higher education participation, as weak labour markets lower the opportunity cost of studying. Yet, during and after the housing crash, this pattern was weakened or even reversed. The authors contend that the destruction of housing wealth, especially among heavily leveraged homeowners, erected financial barriers that outweighed the usual recession-era incentive to “go back to school,” leaving a lasting impact on education decisions.

Housing Wealth Versus Opportunity Costs

Drawing on detailed microdata from the American Community Survey, merged with mortgage credit records and local housing price indices, the study examines around 104,000 households with college-age children. The authors distinguish between two main channels. The first is the opportunity cost effect: when job prospects deteriorate, enrolling in college becomes more attractive, and this applies to everyone. The second is the housing wealth effect: for homeowners, particularly those with mortgages, a drop in home equity reduces the ability to pay tuition. Renters are affected only by the first channel, making them a natural comparison group.

The data reveal a stark pattern: in areas with steep house price declines, the likelihood of college enrolment among homeowners’ children fell sharply relative to that of renters’ children in the same locality. At the bust’s peak, as many as 2% of the local college-age population, roughly 11,500 students in 2010,2011, did not enter higher education due to the erosion of housing wealth.

Mortgages, Leverage, and Family Background

The blow to enrolment was concentrated among mortgagors rather than outright owners, underscoring the role of leverage and credit constraints. Families where parents had no college education were hit hardest, suggesting that cultural attitudes and intergenerational patterns influenced decisions as much as finances did. Geographic differences were striking: Florida, Arizona, Nevada, California, and Michigan were epicentres of the combined shock of high homeownership rates and severe price declines.

Importantly, these effects were not driven by falling rents, local labour market disparities, or migration patterns. The authors confirmed the robustness of their findings through multiple tests, including the use of foreclosure rates, alternative wealth metrics, and an instrumental variables strategy based on local housing supply elasticity, which provided a quasi-experimental lens on the severity of the price drops.

Long-Term Educational and Career Consequences

The research shows that the educational setback caused by the bust endured well beyond the crisis years. By 2019, nearly a decade later, those who were of college age during the worst housing price declines and whose parents were homeowners in the hardest-hit areas were still less likely to have completed any form of college, with the gap most pronounced for four-year degrees.

This educational shortfall translated into lasting labour market effects. While overall employment rates did not differ significantly, the affected group was less likely to work in education-intensive, higher-paying industries. This shift contributed to persistently lower household incomes, with the paper estimating a decline of around 0.35 percentage points in per-capita household income for every one-point drop in local house prices during the bust. The finding is sobering: the lost educational opportunities were not recovered later in life, amounting to a permanent reduction in human capital.

Why Tuition Costs and Tenure Matter

Further analysis reveals that the negative effect of housing wealth loss on enrolment was most severe in states where in-state tuition was high relative to local house values. This suggests that affordability pressures acted as an amplifier for the bust’s impact. The length of homeownership also proved to be a key factor: families who had owned their homes for an intermediate period, long enough to have accumulated significant mortgage debt but not long enough to have paid most of it off, were the most vulnerable. These households saw the sharpest declines in net housing equity and thus faced the greatest difficulty financing higher education.

Demographics played a surprisingly minor role, with race, ethnicity, and gender showing little difference in how the shock was felt, except that Hispanic homeowners appeared somewhat less sensitive to house price falls. The authors suggest this may be because their average home values and college attendance rates were already lower, leaving less room for further decline.

A Policy Warning for the Future

The study frames the housing bust’s educational impact as a deep and enduring trade-off between building wealth through real estate and investing in human capital. This has far-reaching implications for education policy, especially in a country where tuition fees are high and family resources are a major determinant of access to higher education. If college costs continue to rise, families’ ability to finance education will remain closely tied to the performance of housing markets, an asset class that is volatile by nature.

For policymakers, the findings are a warning against one-size-fits-all approaches to making higher education affordable. Support measures should take into account local housing market conditions, particularly during downturns, to avoid an entire cohort’s educational prospects being undermined by a collapse in home values. By documenting how a sharp drop in the main store of middle-class wealth can suppress college attainment for years, the paper draws a direct link between housing cycles and the long-term productivity and inequality of the economy.

The message is clear: the consequences of a housing crash extend far beyond foreclosures, construction slowdowns, and job losses. They also quietly erode the skills and earning potential of the next generation, leaving marks that persist long after the housing market itself has recovered. In this light, housing policy, credit regulation, and education financing are deeply intertwined, and failing to see their connection risks allowing the next crisis to steal opportunities from those who can least afford to lose them.