Student loan payments won’t sink economy

But retailer CFOs may see a dip when forbearance ends.
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· 5 min read

Federal student loans went on pause during the pandemic, but this October, America’s 45.3 million borrowers will need to start repaying ~$1.6 trillion in federal loans. Though the numbers seem large, economists expect the impact on the economy to be modest. Retailers, though, might feel a pinch—especially those which appeal to young people and lower-income shoppers.

CFOs will need to pay attention to several potential business and economic impacts when student loans repayment starts again.

Mild macro impact: Based on its simulations, Moody’s predicts the end of student-loan forbearance will reduce real consumer spending by two-tenths of a percent, Moody’s Analytics economist Bernard Yaros told CFO Brew.

“Is this enough to tip us into a recession? Absolutely not. It’s more of a modest headwind,” said Yaros. “Looking at it from a 30,000-foot view,” he said, there’s little cause for concern “about the end of one of these last vestiges of the pandemic-era emergency support by the federal government to households.”

Other economic forces will lessen the financial pain borrowers experience, Yaros said. Repayments are not coming at a “particularly precarious time” for borrowers, he said, especially compared with last year when “real incomes were really falling because of high inflation as well as the wind down of a lot of the fiscal stimulus or federal transfer payments.” What’s more, he noted, borrowers can take advantage of “generous” income-driven repayment plans, such as the SAVE plan announced by President Biden, that can reduce their payments, or in time, even eliminate them.

Households also have a cushion of excess savings, Yaros said, though he added that these savings are “concentrated in the upper quintile of the income distribution.”

Lower-income consumers will pare spending: On a macro level, the economy shouldn’t experience much of an impact from the resumption of student loan payments. Month-over-month retail sales, and even consumer spending overall, may not appear to shift much, Michael Graziano, consumer products senior analyst and director at RSM, told CFO Brew. However, he noted, that’s because upper-income consumers drive the majority of sales.

Beyond the macro level, demographic differences come into play. Middle-to-low-income consumers will feel the resumption of student loan payments the most.

“That’s the same cohort that’s under the most pressure in today’s macroeconomic landscape” given inflation, Graziano said. The average monthly student loan payment is around $180 a month, the Bank of America Institute estimates, which would be a disproportionately larger share of a lower-income borrower’s monthly budget than a higher-income one’s.

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Retailers whose customer base is middle- to low-income may see sales slow once student loan payments resume. “I do think you’re going to see either some type of a trade down or an outright pullback for a period of time” during which the consumers most affected “take inventory of their monthly payments,” Graziano said. Deutsche Bank estimates that student loan payments could lead to a $14 billion a month hit for retailers, with borrowers spending $305 less per person.

Graziano predicts that consumers who are on a fixed monthly budget will adopt “more strategic buying” habits in response to the additional budget pressure, such as making fewer discretionary purchases in such categories as apparel, beauty products, travel, and leisure.

Younger consumers will spend less, too: Around 62% of borrowers are 39 or younger. It’s likely these consumers will spend less in categories such as clothing, beauty, and alcohol, and make fewer big-ticket purchases, Jack Mackinnon, senior director at Collage Group, a firm which researches consumer trends, told CFO Brew. They’ll also spend less on groceries and home-care products, switching from pricey brands to less expensive ones like private label store brands.

Retailers can expect Gen Z to be price-sensitive, Mackinnon said. They’re accustomed to doing internet research before making decisions, and they’ve paid close attention to the financial struggles of their predecessors, the millennials. Some of the top 10 brands that resonate with them the most, he said, citing Collage Group research, are lower-cost options like Walmart, Ross, and Dollar Tree.

Prepare for a pinch: Consumers have been freer with their spending over the past couple of years, Graziano said, but now they’ll be looking for discounts and more value for money. Retailers, he said, need to make sure they can discount the inventory they have on hand while still protecting their margins. He recommends that retailers either “invest heavily on sophisticated data analytics” or, if they’ve already done so, make use of their sales data so they don’t “become overexposed on inventory that won’t move.”

“Have a strategic and targeted plan as to what items you’re going to be purchasing when,” he said.

Retailers might also see holiday shopping patterns change this year, Graziano said, as loan repayments will start in the fall. Consumers may do more of their holiday shopping early, before their monthly budgets take the extra hit.

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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.