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Student Loan Debt Bomb Threatens U.S. Housing Market

NEW YORK ( MainStreet) -- The housing crisis of recent years has made Americans more determined than ever to cut their mortgage debt, and a report from the Federal Reserve Bank of New York says they're doing a good job of it.

Despite this good news though, there is what could be a ticking time bomb on the horizon: The next generation of college students struggling to stay above water on their student loan obligations.
Student loan debt is set to blow a hole in the housing market and U.S. economy in general, a Fed study says.

According to the Federal Reserve, total student loan debt in the U.S. ticked up in the fourth quarter of 2011 to $867 billion. A white paper released by the Federal Reserve Board to Congress on Jan. 4 suggests that any trouble with growing student loan debt is like a loaded shotgun to the U.S. economy.

In it the study authors note that excessive debt among young Americans has a profoundly negative effect on the U.S. housing market, and on the economy in general, since it is those very young people who typically are first-time buyers for modestly sized homes.

The paper notes that from 2009 through 2011, just 9% of 29- to 34-year-olds were approved for a first-time mortgage. Not coincidentally, that age group is at the front of the line for those drowning in debt from student loans (especially graduate school students and those who have left graduate school), fueled by the apparently unstoppable increase in tution fees at schools around the country.

The Fed paper adds that banks are only lending to "qualified" borrowers, and would-be homeowners with excessive student loan debt aren't high on their approval list. That leaves younger consumers locked out of the mortgage market and forces them into rentals, which takes away a historic linchpin of the entry-level housing market.
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