The suspension of student loan payment, which has been in effect for over three years, is set to come to an end in October, as a result of the Supreme Court’s recent ruling declaring President Joe Biden’s loan forgiveness plan unconstitutional, is expected to have widespread ramifications. Economists anticipate a slowdown in consumer spending as millions of borrowers face the challenge of adjusting their budgets due to the additional expense.
Approximately 26 million adults in the United States currently hold federal student loans that have been in forbearance since 2020. According to analysts at Morgan Stanley, over two-thirds of these borrowers are expected to encounter monthly payments ranging from $200 to $300. The impact of this financial burden will be felt across numerous companies, albeit to varying degrees.
Retailers are gearing up for the impending shift, as Morgan Stanley projects that nearly every company will be affected. Analysts point out that retailers with high exposure to student loan holders, especially those catering to discretionary categories, are likely to be at greater risk. In contrast, retailers with lower exposure to such borrowers are expected to be more insulated. For instance, brands like Target, whose customer base comprises predominantly younger individuals burdened with college and graduate school debt, may experience a more pronounced decline in spending compared to Walmart, whose shoppers tend to be older with less student debt.
The anticipated reduction of $300 in monthly disposable income is expected to prompt a change in spending habits among affected consumers. The analysts note that shoppers are likely to divert their expenditures away from non-essential items such as home goods and clothing and instead prioritize essentials like groceries and car maintenance.
The analysis conducted by Morgan Stanley highlights Target, Dick’s Sporting Goods, Wayfair, and Williams-Sonoma as particularly vulnerable to the anticipated decline in discretionary spending. Conversely, dollar stores like Dollar General and Dollar Tree, along with auto parts shops such as O’Reilly and AutoZone, are expected to witness a lesser decline. Walmart, known for its customer base skewed towards older individuals with less student debt, also falls into the category of retailers projected to experience a milder impact.
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While the Morgan Stanley analysis aligns with earlier reports by Jeffries, an investment banking firm, it does differ slightly. Jeffries found that over a third of discretionary spending by student debt holders is directed toward Amazon, Walmart, and Target. In fact, consumer data company Numerator reveals that Amazon alone captures approximately 18.58% of discretionary spending by individuals with student debt, followed by Walmart at 11.76%, and Target at 5.96%. These figures shed light on the importance of these retail giants in the spending patterns of borrowers.
As the October deadline looms and student loan payments resume, retailers like Target and Dick’s Sporting Goods are preparing for the potential challenges ahead. The financial adjustments faced by millions of borrowers will undoubtedly have an impact on consumer spending, influencing the retail landscape and forcing companies to adapt their strategies to cater to changing priorities.
