Retailers Be Warned: Student Loan Forgiveness Coming To Close

This termination is anticipated to send shockwaves through the personal budgets of millions of Americans and the revenue of popular retail outlets where they regularly spend their disposable income.

First initiated in March 2020 amid the arrival of the COVID-19 pandemic, the Biden administration extended the hiatus on loan repayments eight times, most recently in November. The extension was part of a broader debt forgiveness scheme currently caught in legal entanglement. As a part of a bipartisan debt ceiling agreement ratified by Congress, the administration will not pursue another extension.

As per the Federal Reserve data, the average monthly repayment ranges from $200 to $299, although some borrowers face considerably heftier bills. Come August 30, when the repayments are slated to recommence; borrowers are collectively expected to fork out approximately $10 billion a month, as per an analysis by JPMorgan.

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According to Jay Sole, an analyst at UBS, this impending financial obligation is poised to force households to rein in spending, particularly in the retail sector. In a note, Sole wrote, "Inflation and the overall macro environment has caused U.S. consumers to defer many discretionary purchases over the past 18 months," adding, "Apparel has proven to be the category consumers defer most often."

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June 19, 2023

Sole's note further points out that market research involving 1,392 U.S. consumers with student loans underscored this trend as even more pronounced among this demographic. "We believe this indicates Student Loan Consumers will reduce spending on apparel in a big way when they have to start paying off their student loan debt."

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Brands and retailers such as American Eagle Outfitters, Carter's, Crocs, Foot Locker, Canada Goose, Gap, Nordstrom, Nike, Steve Madden, Under Armour, and Victoria's Secret could potentially feel the impact of this dip in consumer spending, as predicted by UBS.

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UBS is not the only financial institution forecasting a harsh winter for retail. Chris Horvers, an analyst at JPMorgan, projected a hit to Target's sales once the student loan payments are reinstated in early September. Horvers noted, "Target over-indexes to the millennial customer and, should student loan payments come back on, the company is more exposed than others in our coverage." According to Horvers, there's a potential "1-2 point [comparable] headwind to retail spending" with a "consumer outflow range" of $6-8 million per month.

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Meanwhile, President Biden's more extensive student loan forgiveness program remains uncertain, embroiled in legal strife. The executive order proposed by Biden aimed to cancel $10,000 in student loan debt for individuals who earned less than $125,000 in either 2020 or 2021 or married couples who made under $250,000 during the same years. Those who received a Pell Grant while enrolled in school would be eligible for up to $20,000 in debt forgiveness.

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Since its inception the plan has faced at least six lawsuits since its inception, and the Supreme Court is contemplating its constitutional validity. If the Biden administration succeeds in this legal battle, an estimated 8 million federal student loan borrowers will benefit from the one-time cancellation plan. That being said, the scheme also allows borrowers to opt-out.