Why Student Loans Are Retail’s Latest Headache

Mass retailers may have skirted a full-blown spending freeze this year, but trouble is looming on the horizon.

The US moratorium on student loan interest has ended as of Friday, which means 45 million consumers will face a new monthly expense come October — dollars otherwise earmarked for new clothes, vacations and other discretionary purchases.

About 62 percent of people with student loans said they will cut their budgets when payments resume after the three-year pause that began in March 2020, according to Cowen’s consumer survey conducted in June. Of these consumers, 48 percent expect to spend less on clothes, 43 percent on personal care products and 34 percent on luxury goods.

Brands and retailers have already begun to brace themselves for the potential impact. In recent weeks, Gap Inc., Burlington Coat Factory, Ulta Beauty, Foot Locker and Macy’s all pointed to the expiration of student loan forgiveness as at least a potential headwind for the rest of 2023. Foot Locker, in fact, slashed its comparable sales forecast from a 7.5 to 9 percent decline to a 9 to 10 percent.

“The expiration of student loan forgiveness beginning in October, higher interest rate levels, and lower new job creation are all new pressures on the consumer,” Macy’s chief operating officer Adrian Mitchell said in an earnings call on Aug. 22. “It is still unknown how consumers will respond to them, especially after so many months of increased pressures.”

So far this year, consumer spending has remained resilient despite concerns of a possible recession. In July, US retail sales unexpectedly rose 0.7 percent from June amid cooling but persistent inflation. By comparison, in the UK and Europe, sales decelerated in June, the latest data shows.

But, economists say American consumer spending is bound to slow down more significantly at some point in the future, not only because student loan payments will resume this fall but also due to the accumulation of other forms of debt. Americans have racked up more than $1 trillion in credit card debt as of the second quarter of 2023, according to data from the Federal Reserve Bank of New York.

As shoppers cut back, the most vulnerable retailers will be those in the middle of the market in terms of price and lacking a distinct product offering. Case in point, Macy’s and Foot Locker are particularly wary of consumer pressures because, as multi-brand retailers, they compete with a number of similar stores as well as the brands they stock.

Both mall chains, however, already have been struggling in recent months while top players like Lululemon and TJX continue to thrive. From $100 leggings to $10 T-shirts, the key to surviving the ups and downs of economic trends comes down to how value is conveyed. Lululemon sees enduring demand for its pricey workout gear because of its unparalleled quality. TJMaxx and Marshalls, on the other hand, offer consumers a bargain but also an exciting shopping experience — one that changes every week as products quickly turn over.

By providing a differentiated product, price, experience or some combination of the three, retailers stand a chance to weather the return of student loan payments and perhaps even a spending turndown at large.



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Compiled by Sarah Elson.

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