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High student debt is dragging down the U.S. economy

Nowadays, younger Americans are becoming less likely to take out loans to buy a house or a car. One possible reason? They're too overloaded with student debt.

That's one takeaway, at least, from some interesting new research by the Federal Reserve Bank of New York, flagged by Doug Henwood.

The paper starts by noting that student debt has grown dramatically over the last decade — some 43 percent of Americans under the age of 25 had student debt in 2012, with the average debt burden now $20,326. By contrast, back in 2003, just 25 percent of younger Americans had debt, and the average burden was $10,649.

What's particularly notable is that these student loans appear to be crowding out other types of borrowing. For a long time, younger Americans with student debt were more likely to own homes than those without — largely because college grads are likelier to have higher earnings. But that trend has reversed:

The same goes for auto loans — college grads and other Americans with student debt are now slightly less likely to buy cars than those without:

Why is this happening? There are a couple theories explored by Meta Brown and Sydnee Caldwell, the researchers who wrote the study:

— One possibility is that younger Americans burdened by heavy student loans are simply unwilling to take on further debt. Perhaps they're worried about their future job and income prospects, especially in this dismal economy. (Remember, students who are unlucky enough to graduate during the recession typically have lower lifetime earnings.)

— Another (related) possibility is that lenders are becoming stingier. There's decent evidence for this: The study finds that younger Americans with student debt have seen their credit risk scores plummet relative to those without. Banks and other lenders seem to be scared away from people with student loans — especially since delinquency rates are rising.

— A third possibility is that young people are simply no longer interested in buying cars and homes for other reasons. (Maybe they're now more likely to move to transit-oriented cities, for instance.) But it's notable that this cultural shift has accelerated so sharply during the recession.

Whatever the case, it looks like rising student debt has been eating into the housing and auto markets. If so, that could have big implications for the U.S. economy. Auto and housing sales have been a huge driver of growth these past few years, though auto sales are still well below their peak. (Analysts are expecting around 15 to 15.5 million sales in 2013, versus an average of 16.6 million per year during the 2000s.) If younger Americans are retreating from those markets, that could help slow down the recovery, at least in the short term.

On a related note, there have been plenty of stories written lately about how fewer young people are getting their licenses and driving nowadays — usually this trend is chalked up to cultural shifts or Facebook. But student debt could be another big factor here.

Related: Meanwhile, Karl Smith has an interesting post about seasonal fluctuations in student loan payments and how they might explain why we keep seeing the U.S. economy slow down in the spring.