What the return of student loan payments means for retailers

Student loan repayments are scheduled to resume in October after a more than a three-year hiatus that shifted how and where consumers spent their dollars during and after the Covid-19 pandemic.

The return of student loan payments will affect how consumers spend their dollars moving forward, as the temporary bereavement shifted those dollars elsewhere, particularly on e-commerce and home spending, Ermengarde Jabir, senior economist at Moody’s, told Retail Brew. Retailers that have a broad customer base and offer lower prices are best positioned, while those that are specialized and target a specific shopper will struggle, especially among households with a large debt burden.

For the most part, borrowers used the extra cushion in their budget on housing, whether it was buying a home, paying rent, or investing products to outfit or decorate living spaces, Jabir said.

• “Overall, higher interest rates have impeded many homeowners from selling their homes which has been a boon for homebuilders as potential homebuyers decide between limited inventory and increased competition especially for lower price point/starter homes versus new construction and now diminishing sales incentives,” according to a recent Moody’s report.

Although purchasing and investing in homes has fallen off, online shopping has nearly returned to 2020 levels. E-commerce spending as a percentage of total sales for retailers also peaked in 2020 at 16.5%, and although that figure dipped in 2021 and 2022, as of Q2 2023, that number is the highest it’s been for three years at 15.4%, according to The Federal Reserve Bank of St. Louis.

“It’s continuing to grow and it is very promising for retailers engaged in the e-commerce space,” Jabir said. “So they’re definitely tailwinds in the long term for that segment of retail.”

Sink or swim: Once loan repayments continue, the best positioned retailers will be those that cater to as wide of a customer segment as possible, Jabir explained. This scope encompasses sales channels like online versus in-store but also age demographics.

• As of last June, Gen Xers hold the biggest share of the $1.7 billion in federal student loan debt at $525.3 billion. Millennials follow them at $482.4 billion, according to Bankrate.
• According to financial services firm Jeffries, roughly 70% of borrowers plan to shop discount retailers more often when student loan payments restart, which could be a boon for companies like Walmart, Costco, and TJX (the parent of TJMaxx, Marshalls, and HomeGoods).

Katie Thomas, who leads the consumer institute at Kearney, told Retail Brew that consumers are largely capable of making adjustments when it comes to their spending priorities, and the return of loan repayments will just be another recalibration.

“Consumers have mentally removed student loan payments from their budget and it will be an adjustment once it is added back,” she said. “That said, I don’t anticipate seeing a significant pullback in [spending] that can be solely attributed to the return of these payments. It will be one of many factors consumers continue to take on, from inflation to interest rates.”

Zoom out: Student loan repayments are likely to exacerbate issues some households face when it comes to spending money and taking on debt, particularly around the holiday shopping season. According to survey data from Bankrate, 25% of holiday shoppers say they are already stressed over costs and 23% believe spending will strain their already tight budgets.

• Credit card debt has climbed over $1 trillion, which has led to more delinquencies as a result of inflation and higher interest rates.

“Another factor to consider is that the whole segment of households on the margin that need to make these decisions on how to allocate their money might not have access to as much debt,” Jabir said. “Credit card companies or personal loan banks, in general, are doing their due diligence, and perhaps saying, ‘Oh, this person can’t necessarily take on more debt,’ so it’s going to be a very interesting interplay of all of these factors.”