Student loan — The United States was handed a blow on Friday when the Supreme Court decided to overturn President Joe Biden’s student debt relief proposal, which would have erased up to $20,000 in federal student loan debt per borrower.
Student loans are already likely to consume a substantial amount of budgets in the fall, when payments and interest accruals resume after a nearly three-year hiatus due to the epidemic. Biden also outlined initiatives to make the transition to payment resumption smoother, including the possibility of forgiving some of the debts. The ruling also indicates that outstanding loan sums are larger than they would have been had the court approved Biden’s initiative and payments started.
The White House claims that the student loan reduction proposal would have eliminated all debt for approximately 20 million people (45% of borrowers).
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Cautionary spending
Aside from the stress of student debt for millions of people throughout the country, the decision offers a problem for retailers since it adds another factor to predicting consumer purchasing behavior in the coming months.
With payments resumed, about 40 million Americans with student loans may face another financial challenge, despite their increased prudence. According to several studies, virtually all Americans have reduced their expenditure in some way. Customers, according to various shops, have shifted from high-priced products to lower-priced private-label brands.
The Supreme Court’s ruling comes at a difficult moment, particularly given the implications for shops. Student loan repayment will resume just in time for the busy back-to-school and Christmas seasons.
However, KeyBanc Capital Markets retail analyst Brad Thomas believes the loan adjustments will not determine whether the country enters a recession or not. He did, however, warn that it might have a psychological impact on Americans who are already burdened with hundreds of dollars in other monthly payments.
“It’s enough to potentially give us what could be an ugly and disappointing holiday season, relative to expectations,” said Thomas.
Pressure on consumers and companies
Inflationary pressures have forced Americans to pay more for food and housing, while fears of a recession have exacerbated consumer and business anxieties. Furthermore, government initiatives such as debt relief, which were designed to assist households in dealing with the epidemic, have suffered.
Budgets for programs aimed at low-income households have been boosted, including:
- Expanded child tax credits
- A robust Supplemental Nutrition Assistance Program
- Stimulus checks
Consumers have spent their money on experiences rather than things since the cash injection ended, adding to the variables that might harm retail sales in 2023.
The suspension in student loan payments, according to Brad Thomas, was part of the pandemic tailwind for shops. Meanwhile, KeyBanc predicted that it might provide a 2% yearly headwind to retail sales in the next year if not compensated by greater incomes or further borrowings. During earnings calls in the spring, many retailers said that lesser tax returns resulted in weaker sales.
The figures vary depending on how much student loan debtors pay each month. The Bank of America Institute predicts that the average afflicted household will have to spend roughly $180 per month. Meanwhile, higher education consultant Mark Kantrowitz estimates that the average monthly price is roughly $350. Finally, KeyBanc has estimated an average monthly payment of $400 to $460.
Kantrowitz stated that there is little evidence on Americans spending money on student loans that they did not utilize, and he is dubious that payment resumption will have a large influence on stores. The analyst emphasized how the total represents only a small portion of the country’s gross domestic product.
“The impact on retailers is, yes, it’s going to be a negative, but it’s not going to be a huge decrease,” explained Kantrowitz. “It is a mild decrease.”
According to Brett House, an economics professor at Columbia University’s business school, the adjustments to student loans are manageable in comparison to the challenges individuals face due to inflation. The House also stated that many Americans had gotten increases after the payments were halted in 2020.
Companies impacted
The student debt relief decision may have a greater impact on certain firms than others. Several of the firms exposed sell discretionary goods. Analysts at Wells Fargo also believe that experience-driven businesses are vulnerable.
Meanwhile, due to their popularity among recent graduates and newly hired people, Barclays identified the following brands as the most vulnerable:
- American Eagle Outfitters
- Figs
- Urban Outfitters
Target has been identified as a store that will be pressured by KeyBanc and many equities research companies. They noticed a decline in sales while attracting young, college-educated clientele.
However, retailers may not have factored in consumers beginning student loan repayments in their estimates for this year, and several large companies in the industry have yet to remark on the potential consequences. At the end of the retail earnings cycle, the decision was made to discontinue the prolongation of the student loan pause.
While some stores may suffer until payments resume, experts and executives are confident that customers will continue to spend money on flights and dining out.
