Retail Chains Prepare for Slowdown for Resuming Student Loans

August 23, 2023  by HFBusiness Staff in Business Strategy, Industry   

Student loans, along with other forms of consumer debt, are going to "come into focus in the next month or two," Macy's CFO Adrian Mitchell said on Tuesday.

"So we just believe that the customer is coming under pressure because these are new realities that they have to continue to deal with as we get through the back half of this year and move into next year."

"Jobs, wages, and pockets of disinflation are helping our customers. But rising energy prices, resuming student loan payments, higher borrowing costs and tightening lending standards, and a drawdown in excess savings mean that household budgets are still under pressure," Walmart CEO Doug McMillon told Wall Street when the retailer reported earnings.

Federal student loans will begin to accrue interest again on Sept. 1, with payments resuming on Oct. 1. TransUnion's head of global research and consulting Charlie Wise tells Yahoo Finance that roughly 40 million consumers will face the "payment shock" when student debt relief ends.

Consumers were already having trouble paying off credit card debt, as Macy's warned this week. Now, the return of student loan payments could make financial matters worse, with execs warning that the extra expense may lead consumers to pull back spending in other areas.

Yahoo Finance takes a look at the consumer stocks with the most at risk.

Some retailers appear more vulnerable to repayment shock than others heading into the crucial back-to-school and holiday shopping seasons.

"We are most cautious on brands with high exposure to student debt holders and inferior value perceptions amongst 18-34-year-olds, the most representative demographic of student debt holders," TD Cowen analyst Andrew Charles wrote in a note to clients.

The research team at TD Cowen highlighted Target (TGT) and Ulta (ULTA) as particularly vulnerable, due to their exposure to younger, low-income consumers with student loans.

"The resumption of student loan repayments is one of many factors that we're watching really closely," Target CFO Michael Fiddelke told Yahoo Finance as the retailer slashed its full-year profit outlook.

UBS analyst Jay Sole wrote that US student debt borrowers will likely pull back spending on apparel overall since they "prefer brands over private label and specialty retailers over discounters."

Stores with a higher discretionary product mix also face higher risk, according to JPMorgan analyst Christopher Horvers. That includes Target and Ulta, Horvers noted, as well as Dick's Sporting Goods (DKS) and Best Buy (BBY), followed by Home Depot (HD), Lowe's (LOW), Costco (COST), and Walmart, with the primary difference driven by the former group's higher mix of discretionary product.

CEO Brett Schulman told Yahoo Finance that student loan payments restarting was one of the "multitude of factors" up against consumers, along with higher gas prices, costly utility bills, and a "hawkish Fed."

"So we're mindful of those pressures," Schulman said. "We saw a resilient consumer in Q2, but we'd be remiss if we didn't take those considerations into account."

Of course, not all borrowers will have to pay right away.

Those still in school remain "in the regular forbearance period," TransUnion's Wise points out. "But we think that about 26 million-27 million consumers will be facing the beginning or resumption of payments in the next couple of weeks."

There's another catch: The Department of Education is instituting a 12-month "on-ramp" for repayment from Oct. 1, 2023 to Sept. 30, 2024. Though interest will accrue during this period, financially vulnerable borrowers who miss monthly payments won't be considered delinquent or reported to credit bureaus and debt collectors.

Cowen's Charles said in a note to clients this "likely pushes any major impact to spending to late next year."