Discretionary Retail Slowdown Fears As Debt-Saddled Graduates Resume Loan Repayments

U.S. home goods retailers could bear the brunt of a retail slowdown as hundreds of thousands of cash-strapped young people put off setting up new homes, pressured by the resumption of expensive student loan repayments.

Analysts at KeyBanc Capital Markets suggest discretionary spending could slow, hitting companies such as Home Depot Inc HD, Lowe’s Companies Inc LOW and Wayfair Inc (NYSE: W, among others.

“The resumption of student loan payments remains a material headwind for consumers, which we have warned about extensively since June,” said lead analyst Bradley Thomas

COVID-19 Pandemic Relief Program Ends

Student loan borrowers were granted relief from repayments during the COVID-19 pandemic, but this relief period ended earlier this year.

Treasury receipts from the Department of Education (DoE) totaled $6.9B in October — a $5.7B increase from October 2022 when the relief scheme was still running. This, according to research by KeyBanc Capital Markets, represented an annualized $55B headwind compared to the payments made during the relief period.

“If these payments were fully removed from retail sales, it could be a 100+ basis points headwind to retail sales, skewed to more discretionary purchases,” said Thomas.

In 2019, the year before the pandemic struck, more than 45 million people collectively owed $1.6 trillion in federal student loans — an average of more than $350,000 per borrower.

Impact On Retail Sales

Using the DoE treasury receipt data and U.S. retail sales data, KeyBanc estimated student loan repayments represented 1.6% of retail sales in October.

“We believe the outlook for the low-income and middle-income consumer has deteriorated due to a reduction in excess savings, slowing jobs growth and a decline in consumer confidence,” Thomas added.

Young people looking to get a start on their own are likely to find it tough. Those saddled with student loans, who had until recently enjoyed a holiday from their repayment commitments, are likely to find it tougher still.

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