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By striking down student debt forgiveness Friday, the U.S. Supreme Court not only added a hefty expense back into millions of Americans’ budgets. It also created the latest challenge for retailers already struggling to predict how consumers may spend in the coming months.
The court’s decision squashed President Joe Biden‘s plan to forgive up to $20,000 per borrower in federal student loan debt. Student loans will already take a bigger bite out of budgets this fall as payments and interest accruals resume after a more than three-year pandemic-related pause.
The opinion means outstanding loan balances will be higher as those payments resume than they would have been if the court had ruled in favor of Biden. The plan would have wiped out all debt for nearly 45% of borrowers, or about 20 million people, according to the White House.
The return of payments adds another disruption for the approximately 40 million Americans who have student loans at a time when consumers are showing more caution. Nearly all Americans said they are pulling back on spending in some way, according to a recent CNBC and Morning Consult survey. Retailers, including Walmart, Target, Home Depot, Kroger and Foot Locker, said customers are buying fewer big-ticket items and switching to lower-priced private-label brands.
The timing of the change could amplify its impact on retailers. Student debt repayment is poised to resume just before the all-important back-to-school and holiday seasons.
The loan changes won’t “make or break if we go into a recession or not,” said Brad Thomas, a retail analyst at KeyBanc Capital Markets. Yet he said it may have a psychological effect on debt-saddled Americans who are on the hook for hundreds of dollars in monthly payments again.
“It’s enough to potentially give us what could be an ugly and disappointing holiday season, relative to expectations,” he said.
‘Too good to be true’
Lenèe Gill, 31, is one of the borrowers who would have had $20,000 of her loans wiped away. The Denver resident, who works as sales director at a technology company, received Pell Grants to put toward her undergraduate degree at Louisiana State University. Biden’s plan would have eliminated her remaining student debt balance.
Gill said she got a taste of how life without student loans would look during the Covid pandemic. For about three years, she did not pay roughly $400 a month toward her balance. Instead, she saved more money and spruced up the home where she and her fiance live with a new couch, nicer dishes and plants. She chipped away at credit card debt and paid off her car.
Yet she said she never banked on her debt getting canceled.
“It was always one of those things that I felt was too good to be true,” Gill said. “So I never really put a lot of hope or a lot of thought or planning, or even let myself go as far as ‘What would life look like without these payments?'”
Gill said she’ll tighten up the budget as she pays down that debt again. She will likely drop higher-end grocery purchases, such as organic fruits and vegetables and better cuts of meat. Instead of shopping at the farmer’s market, she said she will likely buy more at big-box stores like Walmart for cheaper prices.
Stubborn inflation has forced Americans to pay more for food and housing, and concerns about a potential recession have added to the pressure facing consumers and companies. Meanwhile, government programs like loan relief designed to keep households afloat during the pandemic have fallen by the wayside.
Stimulus checks, expanded child tax credits and a stronger Supplemental Nutrition Assistance Program for low-income households all boosted budgets. That cash infusion has ended, even as consumers less wary of Covid have shifted spending toward experiences instead of goods.
All of those factors could hurt retail sales this year.
KeyBanc’s Thomas said the student loan payment pause was yet another pandemic tail wind for retailers. It could generate an annualized headwind of about 2% to retail sales over the next year if not offset by higher incomes or more borrowing, according to KeyBanc. Many retailers said on earnings calls this spring that smaller tax refunds contributed to slower sales.
Estimates vary on how much student loan borrowers will pay each month. The Bank of America Institute estimates that the median impacted household will pay around $180 a month. Higher education expert Mark Kantrowitz estimated that the typical monthly bill will be about $350. KeyBanc estimates an average monthly payment between $400 and $460.
Kantrowitz said there is little data on how Americans used the money that they did not spend on student debt. Did they buy more luxury items, book a vacation or save?
He said he’s skeptical that the resumption of payments will have a major effect on retailers, since the sum accounts for a tiny percentage 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,” he said. “It is a mild decrease.”
Brett House, an economics professor at Columbia University’s business school, echoed similar sentiments. He said the student loan changes are modest compared with the pinch that people feel from inflation or the dwindling of pandemic-strengthened savings accounts.
He added that many Americans have gotten raises since the payments paused three years ago.
The companies most affected
The end of student loan relief may hit some businesses harder than others.
Some of the most exposed companies are ones that sell a lot of discretionary merchandise, including Bath & Body Works, T.J. Maxx parent TJX Cos., Dick’s Sporting Goods and Best Buy, according to Wells Fargo analysts. Experience-driven companies are also at risk, including FanDuel’s parent company Flutter Entertainment, DraftKings and Lifetime Fitness, the firm said.
Barclays said American Eagle Outfitters, Urban Outfitters and Figs are the most vulnerable because of their popularity among recent college graduates and newly employed.
Several equity research firms, including KeyBanc, named Target as a retailer that will get squeezed, since its sales have already weakened and it draws younger and college-educated customers.
Retailers may not have accounted for consumers resuming student loan payments in their forecasts for the year, and most major players in the sector have not commented on the possible implications. The decision to stop extensions of the student loan pause, which was part of an agreement reached by Republicans and Democrats to raise the nation’s debt ceiling, came after the end of the retail earnings cycle.
Though some retailers may take a hit when payments resume, analysts and executives largely believe people will keep spending on dining out and airline tickets.
Rick Cardenas, CEO of Olive Garden’s parent company Darden Restaurants, said last Thursday that the return of student loan payments will be a factor for the company, but not a significant one. Darden owns a mix of restaurant chains, including LongHorn Steakhouse and The Capital Grille.
“Any time you take money out of consumers’ pockets, it’s a headwind, but it shouldn’t be material, because student loan payments are a very small component,” Cardenas told analysts on the company’s earnings conference call.
He added that Darden’s customers will be better able to juggle the payments, since a high percentage earn more than $100,000 annually.
Wall Street analysts don’t anticipate a big drop in sales for eateries when loan relief ends, either.
Citi Research analyst Jon Tower wrote in a March note to clients that it’s a “contained risk” for restaurants.
BTIG analyst Pete Saleh told CNBC that “it will be just another drag on consumer spending, in addition to inflation.”
“But we know that historically, all of this other stuff is traditionally noise — what drives most restaurants’ same-store sales and traffic is job growth and income growth, and we’re getting both of those right now,” he said.
Airlines also may be more immune to the hit to borrowers’ budgets.
Strong travel demand and airfares at about pre-pandemic levels helped lift some airlines’ revenue to a record in the first quarter of the year, and airport security screenings on some days this month have surpassed pre-pandemic levels as consumers spend on experiences.
“Given how much incomes have increased in the past three years, I can’t see how this is going to be a major challenge,” Frontier Airlines CEO Barry Biffle told CNBC.
Where airlines are more vulnerable to a pullback in spending is during off-peak periods.
“You’re going to travel for Thanksgiving and Christmas. I think that’s engrained in the U.S. consumers’ head,” said Conor Cunningham, airline analyst at Melius Research. “I’m not worried about summer travel. Summer travel is going to be amazing. It’s the off-peak stuff that’s got me worried.”
That usually occurs after the peak summer period and in between holidays when business travel — and during the pandemic, remote work and off-season trips — had been able to fill in the gaps. Some airlines could alter their schedules to adjust for weaker demand.
Even if many industries do not take a hit from the demise of student debt cancelation and the resumption of payments, millions of Americans will feel the change acutely.
Tiffany Serra said the reality of her looming payments is “starting to creep in and stress me out.”
The 23-year-old graduated in 2022 from Cornell College in Iowa with a bachelor’s degree in finance and environmental studies — along with $120,000 in debt. She is working a seasonal position on Shelter Island in New York and makes $22 an hour, along with having her housing costs covered. Serra said she has had trouble finding a full-time job.
Starting this fall, Serra will pay that debt down for the first time. She’s tried to prepare by socking away money to cover that big bill, which she expects will be at least $600 per month. Serra also embraced new habits to cut spending, including growing herbs at home and making her own oat milk.
Student loan forgiveness would have made a small dent in her total debt, but Serra said she still wishes the plan had stuck. Serra recently got into law school, but decided to turn it down to avoid racking up more student loans.
She said she’ll have to make tough decisions in the months ahead, such as whether she can afford to renew the lease on her car. She won’t have the breathing room that allowed her to buy steel-toed boots for work or book a trip to the San Francisco Bay Area to visit a friend.
“It’s definitely going to be a large financial burden when I do have to start making those payments,” Serra said.
— CNBC’s Amelia Lucas, Gabrielle Fonrouge, Leslie Josephs and Annie Nova contributed to this story.
Disclosure: CNBC’s parent company Comcast and NBC Sports are investors in FanDuel.