A shopper browses shirts in the children’s section at Old Navy in Denver, Colorado.

Brent Lewis | Denver Post | Getty Images

According to student debt forgiveness On Friday, the U.S. Supreme Court not only added hefty expenses back into the budgets of millions of Americans. This has also created the latest challenge for retailers are already trying to predict how consumers may spend in the coming months.

The court’s decision crushed the president Joe Bidenhas plans forgive up to $20,000 of federal student loan debt per borrower. Student loans already take a a bigger bite out of the budget this fall as payments and accrual of interest resume after more than three years pandemic-related hiatus.

The opinion means the outstanding loan balances will be higher after those payments resume than they would have been had the court ruled in Biden’s favor. The plan should wiped out all debt of nearly 45% of borrowers, or about 20 million people, according to the White House.

The chargebacks add further disruption to the roughly 40 million Americans who have student loans at a time when consumers are exercising more caution. Almost all Americans said they were spend back in some ways, according to a recent survey by CNBC and Morning Consult. Retailers, incl Walmart, target, Home Depot, Kroger and Foot lockerthey said customers are buying fewer high-priced items and switching to cheaper private labels.

The timing of the change could amplify its impact on retailers. Student debt repayments are set to resume just before the all-important back-to-school and holiday season.

The credit changes “are not going to work or break if we go into a recession or not,” said Brad Thomas, retail analyst at KeyBanc Capital Markets. Still, he said it could have a psychological impact on indebted Americans who are once again on the hook for hundreds of dollars in monthly payments.

“It’s enough to potentially give us what could be ugly and disappointing compared to expectations,” he said.

‘Too good to be true’

Lenèe Gill, 31, is one of the borrowers who would have $20,000 of her loans wiped out. The Denver resident, who works as a business director at a technology company, received Pell Grants to pursue a bachelor’s degree at Louisiana State University. Biden’s plan would eliminate her remaining student debt balance.

Gill said she got a taste of what life would be like without student loans the Covid pandemic. She missed paying about $400 a month on her balance for about three years. Instead, she saved more money and decorated the house where she and her fiancé live with a new sofa, nicer dishes and plants. She cleared her credit card debt and paid off her car.

Still, she said she never expected her debt to be canceled.

“It was always one of those things that I thought was too good to be true,” Gill said. “So I never really had much hope, much thought or planning, or got as far as, ‘What would life be like without these payments?’

Gill said she will tighten the budget when she pays off that debt again. They are likely to abandon 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 is likely to shop more at big box stores like Walmart. cheaper prices.

Stubborn inflation has forced Americans to pay more for food and housing, and fears of a potential recession have added to the pressures facing consumers and companies. Meanwhile, government programs such as credit relief designed to keep households afloat during the pandemic have declined along the road.

Stimulus checks, expanded child tax credits and stronger Supplemental Nutrition Assistance Program for low-income households all increased budgets. That the cash infusion is overeven as consumers less wary of Covid shifted spending towards experiences instead of goods.

All of these factors could hurt retail sales this year.

KeyBanc’s Thomas said the pause in student loan payments was another pandemic tailwind for retailers. That could generate an annual headwind of about 2% to retail sales next year, unless offset by higher earnings or more lending, according to KeyBanc. Many retailers this spring said smaller tax refunds contributed to the slowdown in sales.

Estimates vary based on how much student loan borrowers will pay each month. The Bank of America Institute estimates that the average affected household will pay around $180 a month. Higher education expert Mark Kantrowitz estimated that a typical monthly bill would be about $350. KeyBanc estimates the average monthly payment to be between $400 and $460.

Kantrowitz said there is little data on how Americans used the money they didn’t spend on student debt. Did they buy more luxury items, book a holiday or save?

He said he was skeptical that the resumption of payments would have much of an impact on retailers because the amount represents a small percentage of the country’s gross domestic product.

“The impact on retailers yes, it will be negative, but it won’t be a huge drop,” he said. “It’s a slight drop.

Brett House, a professor of economics at Columbia University’s business school, echoed similar sentiments. He said the changes to student loans are mild compared to the pinch people are feeling from inflation or shrinking savings accounts boosted by the pandemic.

He added that many Americans have received raises since the payments were suspended three years ago.

Most affected companies

The end of student loan relief may hit some businesses harder than others.

Some of the most exposed companies are those that sell a large amount of free goods, including Bath and massageTJ Maxx parent TJX Cos., Dick’s Sporting Goods and Best buy, according to Wells Fargo analysts. Experience-based companies are also at risk, including parent company FanDuel Fun Flutter, DraftKings and Lifelong fitnessthe company said.

said Barclays American Eagle Outfitters, Urban Outfitters and Giant they are most vulnerable because of their popularity among recent college graduates and newly employed.

Named several equity research firms, including KeyBanc target as a retailer that will be squeezed as its sales have already weakened and it attracts younger and college-educated customers.

A TJ Maxx store owned by TJX Cos Inc in Pasadena, California.

Mario Anzuoni | Reuters

Retailers may not have factored in consumers resuming student loan repayments in their forecasts for the year, and most of the industry’s major players have not commented on the potential implications. The the decision to stop extending the student loan pausewhich was part of the deal reached by Republicans and Democrats to raise the national debt ceiling, came after the end of the retail earnings cycle.

Although some retailers may be hit when payments resume, analysts and executives mostly believe people will continue to spend on dining and flights.

Rick Cardenas, CEO of parent company Olive Garden Darden Restaurant, said last Thursday that the return on 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.

“Anytime 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 payments because a high percentage earn more than $100,000 a year.

Even Wall Street analysts don’t expect much of a drop in restaurant sales when the loan relief ends.

Citi Research analyst Jon Tower wrote in a March note to clients that this is a “closed risk” for restaurants.

BTIG analyst Pete Saleh told CNBC that “that’s just going to be another drag on consumer spending, apart from inflation.”

“But we know that historically, all of these other things are traditionally noise — what drives same-store sales and traffic in most restaurants is job growth and revenue growth, and we’re getting both of those right now,” he said.

Airlines may also be more immune to the squeeze on borrowers’ budgets.

Strong travel demand and pre-pandemic ticket prices helped lift some airlines’ sales to a record in the first quarter of the year, and airport security checks exceeded pre-pandemic levels on some days this month as consumers spend on experiences.

“Given how much revenue has increased over the last three years, I can’t see how that will be a big challenge,” Frontier Airlines CEO Barry Biffle told CNBC.

Where airlines are more vulnerable to a drop in spending is during the off-peak period.

“You’re going to travel on Thanksgiving and Christmas. I think that’s ingrained in the minds of American consumers,” said Conor Cunningham, an 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 worries me.”

This typically occurs after the peak summer season and between holidays, when business travel — and during the pandemic, remote work and off-season travel — has been able to fill the gaps. Some airlines could adjust their flight schedules to accommodate weaker demand.

While many industries won’t be hit by the demise of student debt cancellation and repayment, 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 from Cornell College in Iowa in 2022 with a bachelor’s degree in finance and environmental studies — along with $120,000 in debt. He works in a seasonal position on Shelter Island, New York and earns $22 an hour, plus living expenses. Serra said she is having trouble finding full-time work.

Starting this fall, Serra will pay off that debt for the first time. She tried to prepare by scraping together money to cover the big bill, which she said would be at least $600 a month. Serra also adopted new habits to cut expenses, including growing herbs at home and making her own oat milk.

Student loan forgiveness would put a small dent in her total debt, but Serra said she still wishes the plan would stop. Serra recently got into law school, but decided to turn it down to avoid taking out more student loans.

She said she will have to make tough decisions in the coming months, such as whether she can afford to extend her car lease. She won’t have the breathing space that allowed her to buy steel-toed shoes for work or book a trip to the San Francisco Bay Area to see a friend.

“It’s definitely going to be a big financial burden when I 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 parent Comcast and NBC Sports are investors in FanDuel.

Source Link