Consumers and retailers brace for student loans payments to restart

The end of the pandemic-era grace period is another pressure point for American households already getting pinched by inflation, high interest rates and record credit card debt. Economists say it could further cool consumer spending — long a bright spot for the U.S. economy — by redirecting billions of dollars to monthly loan payments.

The timing is particularly rough on retailers, which are gearing up for the crucial holiday shopping season. The investment bank Jefferies estimates the renewed student loan payments will come to $18 billion a month, or 3 percent of the $686 billion that Americans spent on retail and food services in May, according to Census Bureau estimates.

Experts say department stores and specialty retailers will be the hardest hit, as consumers forgo new clothes and electronics, or trade down to big box stores and discounters. Discretionary spending of all kinds — from dining out to streaming services to travel — will also take a hit.

“This is a major hit to most people’s budget,” said Katie Thomas, who studies the retail market at the Kearney Consumer Institute think tank, “and the fact that it’s been paused for so long means that people have mentally taken that out of their budgets.”

The Biden administration last summer announced new regulations to ease student loan debt burdens, allowing the Department of Education to forgive between $10,000 and $20,000 in federally-owned student debt, create new income-based repayment plans to cut monthly balances and allow borrowers who worked for a nonprofit or in government service to earn more credits toward loan forgiveness.

Six Republican-dominated states sued Biden to block that plan. The Supreme Court is set to rule on the case, Biden v. Nebraska, in the coming days.

The payment restarts could inflict economic hardship for some consumers, or at least force them to rethink their lifestyles. The average monthly payment, Jefferies found, is $393.

David Sharpensteen plans to move to a cheaper place to accommodate his monthly $600 payment. “I’ve been literally looking for new apartments so I can get back under my budget,” he said.

The Pittsburgh-based graphic designer, 40, will also reduce his retirement saving and stop eating out. He still owes $36,000 on the $60,000 in loans he took out between 2003 and 2009 for his degree from Western Kentucky University.

“The bottom line is, when student loan payments resume, this will take a toll on household savings, and it’s also likely to be an additional drag on U.S. consumption,” said Claire Li, vice president and senior analyst at credit rating service Moody’s.

Thomas expects more consumers will trade down to big box stores, discount chains and off-price retailers. Shoppers may also further cut down on discretionary spending, such as home improvement and furniture, Thomas added.

Syracuse University retail professor Shelley Kohan predicts department stores and specialty retailers will be hit the hardest, as millennial consumers forgo spending on clothes and accessories at midrange stores.

“You might see retailers that have really put a lot of effort behind fashion in the discount sectors, actually being benefited by this,” Kohan said, pointing to Target and Walmart, which have invested in apparel.

Moody’s research found consumer spending on apparel and footwear and furniture and home decor outpaced market trends by 13 percent and 6 percent, respectively, since the start of the pandemic.

October is often when consumers begin holiday shopping. Sales are starting earlier and earlier, Kohan said, and consumers facing loan payments in the fall may begin planning even sooner.

Retailers have already done their holiday ordering, making it difficult for their inventory planning. But Simeon Siegel, an analyst with BMO Capital Markets, thinks companies aren’t too spooked by the news. Consumers view holiday shopping as a necessity, finding ways to stretch their budgets to make it work.

Siegel sees no exception this year.

“The U.S. consumer has proven perhaps overly resilient than they should be, and that is generally in the face of many obstacles — the student loan pause feels like one of those,” he said. “But I don’t know that companies are seeing that deadline looming and beginning to panic.”

Data suggests that many of the people who will have to resume payments have more resources. Before the pandemic, nearly 40 percent of monthly payments were made by borrowers in the highest income brackets, according to research by the Brookings Institution.

That’s because individuals who take out loans for advanced degrees, such as doctors and lawyers, often command the highest earnings, and therefore have the funds to make payments, said Adam Looney, a University of Utah professor who helped conduct the Brookings research. Less wealthy individuals often enroll in programs to link their monthly payments to a proportion of their monthly income.

But that still leaves many borrowers like Thurmond, 42, who took out loans for degrees in search of jobs to vault them into — or help them remain in — the middle class.

When Thurmond began attending the University of Arkansas at Fort Smith, he was well into his 30s and married, with a stepdaughter in grade school. He wanted to set a good example for her, he said, and break into a better-paying career.

Thurmond graduated shortly after the student loan moratorium began and landed a job with a human resources consulting firm after years of restaurant work and sales gigs.

He and his wife used the money they were saving from the loan forbearance to buy more reliable cars and save for their daughter, who starts college in August. They’ll rely on savings to pay whatever expenses are left after scholarships, Thurmond said, so she can leave school debt-free.

“We’ve told our child that she can do whatever she wants in this life,” he said, “and that we are going to ensure that we do everything we possibly can to make sure that she doesn’t have to suffer the way we suffer.”

Now, to make that extra $460 a month, he’s picking up side gigs, singing in a cover band that plays at local bars and festivals and freelancing business administrative work.

“I’d like my weekends,” he said, “but I’d like to be able to pay for my college education, as well.”