Retailers are cautiously waiting to assess the next potential headache on the horizon for bottom lines: student loan debt repayments.
Borrowers who haven’t seen a monthly bill for more than three years will begin accruing interest once again on Sept. 1, with payments resuming the following month.
Fashion and retail executives who are already seeing their consumer base buckle under higher interest rates and inflation are girding for the next spending headwind.
“The environment itself remains difficult and volatile,” Matt Puckett, executive vice president and CFO at Vans and Supreme parent VF Corp. said earlier this month. “We recognize that many consumers are feeling impact to their disposable income and are continuing to deal with inflation, facing higher interest rates and, in the U.S., the upcoming end to the student loan pause.”
Revolve Group Inc. CFO Jesse Timmermans suggested the company, which has a fair amount of aspirational luxury shoppers, could already be seeing the impact.
As a result, Revolve is buying inventory with caution.
“To some extent, we feel like maybe some of that looming student loan repayment is already impacting the consumer and her buying behavior,” Timmermans told analysts this month.
Tightening Credit
Macy’s Inc. revenue from credit cards took a hit in its recently ended quarter.
“The macro environment really is having the lion’s share of the impact on credit and is a real indicator of where we think the health of the consumer is and supporting our cautious approach,” Macy’s Inc. CFO Adrian Mitchell said during a quarterly conference call with analysts Tuesday.
Despite management anticipating higher loan delinquencies, they ramped faster than expected.
“The one metric we find quite interesting is the debt service ratio, which we leverage as a proxy for the consumer’s ability to pay debt using their disposable income – personal income. So this is about credit card balances. This is about student loans, which we know is going to come into focus in the next month or two. Auto loans, mortgages. We just believe that the consumer is coming under pressure because these are new realities that they have to continue to deal with as we get through the back of this year and move into next year.”
Earnest Analytics released a report in July identifying the top retailers facing the most exposure to borrowers who had suspended their loan repayments during the pandemic. Within apparel and retail that includes Old Navy, which held a 14 percent share of that borrower group in 2022. Nordstrom held 8 percent, the lowest of any company in the apparel and retail category.
Student Loan Repayment Status
Repayment on federal student loans had been suspended for more than three years as an emergency response to the pandemic.
The Biden administration has attempted to offer relief to borrowers, including a plan to cancel as much as $20,000 in federal student loans for those who qualified. That plan was struck down by the Supreme Court in June.
Biden then said there would be a 12-month transition period in which borrowers who missed payments would not go into default. Interest, however, would still accrue during this period.
On Tuesday enrollment opened for Biden’s Saving on a Valuable Education (SAVE) repayment plan, which is aimed at reducing loan payments based on borrowers’ income.
Undergrad debt payments would be cut from 10% to 5% of a borrower’s discretionary income under the SAVE plan.
In some cases, a borrower’s monthly payments would be reduced to zero. The administration used the example of someone making $15 an hour as qualifying for no monthly payments and estimated around 1 million borrowers would fall into this bracket.
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