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Housing Bust May Decrease Middle-Class Teens' Likelihood Of Attending Top Colleges: Study

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For Marliza Melzer, the housing bust has meant the end of two American dreams.

"My mortgage is underwater so I can’t pay for my son to go to college," she said. "He wants to make something of himself."

At the height of the housing bubble in 2006, Melzer bought a house, one that she says she knew she couldn't afford despite an easy loan process. Now, the value of her Seattle-area home has plummeted, along with those of millions across the nation. Largely because of that, she must push back against her son's repeated requests for her to pay for his college education. With her wealth depleted, she simply can't afford it.

"All the money we had went into the down payment on our house and then saving up after that was, like, 'Oh my gosh,'" she said.

Melzer's plight is shared by many homeowners after the bust. And some new research shows that a decline in parents' housing wealth can mean a decrease in their children's chances of attending a higher-quality college, forcing families to reevaluate college choices.

The likelihood that a child will attend a flagship public university instead of a state college increases 2 percent when a family experiences a $10,000 boost in the wealth of their house, according to a study released earlier this month by Michael Lovenheim, a Cornell University assistant professor of policy analysis and management, and Lock Reynolds, a Kent State assistant professor of economics. Any boost in housing wealth meant that students were more likely to apply to more schools, they found. This trend is found largely among lower- and middle-income families, which they defined as households making $75,000 or less. The researchers interviewed 2,801 students each year from 1997 to 2008.

Lovenheim and Reynolds said it's difficult to estimate how their research -- based on an analysis of data during the housing boom -- would apply to the period after the housing bust, which arrived with declines in employment and stock market wealth. Still, the housing crash might affect how lower- and middle-income students perceive their college choices, they said.

The housing downturn has affected countless Americans like Melzer. About 11 million U.S. homeowners are underwater on their mortgages, according to U.S. News, while about 4 million families lost their homes to foreclosure from 2007 to the start of 2012, according to The New York Times.

Still, there may be some good news ahead for homeowners. After six years of housing price declines, the median home price rose in more than half of the United States' metro areas during the first three months of this year, the Wall Street Journal reported.

"It could be argued that the recent bust will have pretty big effects on whether the students go at all and also the quality of schools that students select," Lovenheim said.

Even so, the Free Application for Federal Student Aid doesn’t request information about housing equity , Reynolds and Lovenheim said. Congress decided to eliminate housing wealth considerations from the application so that students could seek financial aid without any concern about appreciation in price of their family's home, Lovenheim said.

"It sounds like a really great thing, until your house loses a bunch of wealth," Lovenheim said. "For lower- and middle- income people, that's where their wealth is. And then you lose all that wealth, and you don’t get any more financial aid."

Students are also more likely to apply to additional schools when their parents see a boost in housing wealth, which increases the probability that the college attended will be of better quality. Reynolds said it’s hard to tease out why that is, but said that chances for admission don't increase with a rise in family housing wealth.

"They are schools they would’ve gotten in before, but they didn't apply to them," Reynolds said. "There is either perceived or real differences in what students think they are able to possibly afford."

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