On June 30, the Supreme Court rejected the Biden Administration’s bid to cancel student debt, throwing the country’s economic recovery a curveball.
The proposed plan from President Joe Biden was to cancel up to $20,000 of student debt for Americans earning less than $125,000 a year individually and $250,000 as married couples. But in a 6-3 decision, the Supreme Court ruled that the student loan forgiveness plan violates a 2003 federal law that prohibits the program from wiping out nearly $500 billion in debt. The three-year payment freeze instated during the pandemic will lift on August 30, and interest on those loans will accrue again before repayment begins in October. As the country has slowly and arduously battled high inflation and interest rates, resuming student loan payments poses another potential challenge.
Since the onset of the Covid-19 pandemic in the U.S. in 2020, student loan repayments had been suspended, without interest, for most borrowers. In a country where over 43 million people collectively hold more than $1.75 trillion in student loans, this three-year period represented for many people a new lease on life without the obligation of payment. According to the Federal Reserve, 55% of people under 30 years old who went to college took on some debt for their education, such as student loans, and 17% percent of those with education debt were behind on their payments in 2019. Of those making payments, the typical required monthly payment was between $200-$299 per month. Naturally, that money went toward other expenditures, including discretionary retail.
UBS data shows the resumption of payments could cause an underappreciated slowdown in consumer spending. Jay Sole, retail analyst for UBS, stated in a June 4 analyst note that there could be a possible sharp reduction in spending on clothing. UBS conducted an online survey of 8,499 consumers over 18, of which close to 1,392 have student debt. The survey revealed that consumers with student loans were more likely to purchase Nike products over the prior six months than any other brand. Levi’s Jeans, Calvin Klein and Under Armour were featured prominently. Sole wrote that the end of the student loan payment moratorium will impact mass brands and retailers like American Eagle Outfitters, Nike and Gap.
“Our new analysis of U.S. consumers with student loans suggests they are likely to disproportionately reduce spending on softgoods vs. other categories as they shift funds to paying down student debt,” the note states. “Furthermore, these consumers prefer brands over private label and specialty retailers over discounters.”
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This is at odds with the National Retail Federation forecast from March that 2023 retail sales would grow between 4-6%, reaching more than $5.13 trillion. NRF declined to comment on this story and did not respond to an inquiry about whether it is a topic the NRF will examine.
It won’t take long for retailers to feel the effect. Dollar Tree, for example, noted on its May 25 earnings call that the reduction in food-stamp benefits in the first quarter, coupled with smaller tax refunds during the same period, led consumers to focus more on needs rather than wants. Deutsche Bank estimates that a resumption of student loan payments will cut U.S. consumer spending by up to $14 billion per month. That amounts to $305 per borrower, analysts Gabriella Carbone and Krisztina Katai wrote in a June 21 note.
On their earnings calls, other brands and retailers — particularly those catering to lower-income households — also mentioned the impact of the economy. During its May 25 earnings call, Gap Inc. executives mentioned the vulnerability of Old Navy and that it continues to experience a decrease in demand from lower-income consumers. First-quarter Old Navy sales declined 1% year-over-year to $1.8 billion, viewed as an improvement because it was a slower decline compared to fiscal year 2022. And in a June 1 earnings call, Macy’s executives noted the company’s great reliance on lower- and middle-income consumers, with roughly 50% of its identified customers having an average household income of $75,000 or under. About 85% of its customers are at $150,000 or under. Jeff Gennette, CEO of Macy’s, said at the time that he had yet not seen customers trading down. However, in some cases, he said customers were shopping and spending more at either lower-priced Macy’s Backstage or at Macy’s smaller-footprint Market by Macy’s and sticking to their budgets.
