Housing Wealth, Liquidity Constraints and College Enrollment

Do liquidity constraints prohibit individuals from making optimal consumption and investment decisions over the life cycle? I test for the existence of short-run credit constraints surrounding the decision to invest in college, which is of particular concern given the large recent increases in the real cost of college attendance. I add to the literature on higher education credit constraints by using the timing and geographic dispersion of the recent housing boom to generate exogenous household housing wealth variation. Using data from the Panel Study of Income Dynamics (PSID), I identify how changes in a household’s housing equity in the 4 years prior to its child being of college-age affect the likelihood that child attends college. The results indicate that the 4-year growth in housing equity raises college enrollment and that the effect is localized to the 2000s and to households most likely to be credit constrained. The estimates also indicate the effects of housing wealth on college enrollment are restricted to those who live in high housing price growth, low population growth MSAs, and there is little evidence that differential sorting of households with higher ability children into houses that appreciate more can account for my results. I calculate that upwards of 12 percent of families with children in college use housing equity to relax potential short-run credit constraints, and the estimates imply that the recent bust in the housing market may reduce college enrollment by 3.6 percentage points. This finding has important ramifications for the longer-run supply of high-skilled labor.