As Student Loan Payments Resume, Retail Analyst Predicts Consumer Shockwaves

After over three years of a pandemic-induced pause, federal student loan borrowers are bracing for the resumption of their monthly payments starting in October, potentially resulting in new spending patterns and financial stress for nearly 44 million Americans.

According to Jefferies, retailers could face headwinds, as indicated by the firm’s survey suggesting that the apparel, accessories, restaurant, and footwear sectors are poised to bear the brunt of the impact.

The Revival Of Repayments: The start of loan repayments is poised to curtail consumer spending significantly, Jeffries told investors on Monday.

Interest, frozen since March 2020, resumed its accrual from Sept. 1, with most borrowers scheduled to make their first payments in October. A key observation Jeffries made is that despite the looming financial commitment, about 31% of respondents have not initiated budgeting for the resumption of student loan payments.

Consumer Concerns, And The Retail Sector: Almost 90% of survey respondents expressed anxiety about affording their monthly expenses due to student loan payments.

Jeffries says sectors like apparel/accessories, restaurants, and footwear will see pronounced pullbacks in spending, impacting companies like Lululemon Athletica Inc LULU, Foot Locker Inc FL, and Urban Outfitters, Inc URBN, which the analyst flagged as the most exposed to spending cutbacks.

Around 54% of respondents say they're going to reduce spending on apparel and accessories, while 51% anticipate shopping less frequently and buying fewer items. Thirty-nine percent of respondents said they're going to shop for cheaper alternatives.

Winners And Losers: Shifts in consumer behavior are likely to create varied impacts across the retail sector.

Jeffries said companies like Walmart Inc WMT, Costco Wholesale Corporation COST, and TJX Companies Inc TJX are expected to navigate headwinds effectively, given their established footing in value retail and potential to offer cheaper alternatives to consumers.

About 70% of respondents plan to increase their frequency of shopping at discount retailers due to student loan payments, providing a relative safeguard for Walmart, Costco and TJX against downturns.

Walmart, in particular, remains a top pick for Jefferies.

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Specialty Apparel And Footwear: The specialty apparel and footwear sector is likely to face challenges caused by impending student loan repayments.

The survey found that about 54% and 46% of respondents intend to reduce spending on apparel/accessories and footwear, respectively. Companies like Urban Outfitters and Foot Locker are particularly exposed to risks due to their existing customer demographics and ongoing expansions into new product sets, carrying incremental risks in the macroeconomic environment.

Policy Developments And Borrower Protections: In parallel with retail shifts, policy developments also play a role in shaping borrower behaviors.

The current "on-ramp period" extends until Sept. 30, 2024, and offers a grace period wherein borrowers will not face typical consequences, such as credit score impacts or loan defaults, for missing a payment, mitigating some immediate effects of payment resumptions.

However, the relief is overshadowed by the June Supreme Court ruling striking down President Joe Biden's student loan forgiveness program, quashing hopes for up to $20,000 in federal student debt relief for millions of borrowers.

The apprehension surrounding repayment resumptions is set to sculpt new consumer behaviors, Jeffries noted, impacting several retail sectors while also offering growth avenues for value and discount retail entities.

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