For more than three years, federal student loan borrowers have not had to make monthly payments. But that pandemic-era pause is coming to an end this fall, setting up a financial shock for millions of Americans – and the big-name stores where they shop.
About 44 million borrowers in the U.S. were affected by the payment pause, which initially began in March 2020 at the onset of the COVID-19 pandemic. The Biden administration extended the pause for the eighth time in November with its broader debt forgiveness plan tied up in legal limbo, but will not do so again as part of the bipartisan debt ceiling deal approved by Congress.
Payments, which are set to resume on Aug. 30, can be substantial: The average monthly bill hovers between $200 and $299 per person, although it is even higher for some borrowers, according to the most recent Federal Reserve data.
Collectively, borrowers are set to resume paying about $10 billion a month, according to a recent analysis from JPMorgan.
The resumption of these payments will likely force households to cut back on spending in other areas – particularly retail, according to a note from UBS analyst Jay Sole.
"Inflation and the overall macro environment has caused U.S. consumers to defer many discretionary purchases over the past 18 months," Sole wrote in the note. "Apparel has proven to be the category consumers defer most often."
Sole added: "Interestingly, market research of 1,392 U.S. consumers with student loans shows this trend is even more pronounced among this group. We believe this indicates Student Loan Consumers will reduce spending on apparel in a big way when they have to start paying off their student loan debt."
A number of brands and retailers could be negatively affected by the spending reduction, including: American Eagle Outfitters, Carter's, Crocs, Foot Locker, Canada Goose, Gap, Nordstrom, Nike, Steve Madden, Under Armour and Victoria's Secret, according to UBS.
UBS is not alone in its warning of a coming ice-age for retail.
JPMorgan analyst Chris Horvers said that Target sales could face a hit once student loan repayments begin in early September. That's because Target caters to millennials, which carries a large share of student loan debt.
"Target over-indexes to the millennial customer and, should student loan payments come back on, the company is more exposed than others in our coverage," Hovers wrote in the note. "Buy-side client expectations are in the $6-8 million per month consumer outflow range should this happen, per our conversations, which represents a potential 1-2 point [comparable] headwind to retail spending."
The return of student loan payments comes as President Biden's broader student loan forgiveness plan remains tied up in legal limbo.
Biden's executive order cancels $10,000 in student loan debt for individual borrowers who earned less than $125,000 in either 2020 or 2021, or married couples who made less than $250,000 annually in those same years. If a qualifying borrower also received a Pell grant while enrolled in school, they are eligible for up to $20,000 in debt forgiveness.
The plan faced at least six lawsuits after it was rolled out, and the Supreme Court is currently weighing the constitutionality of the proposal.
If the Biden administration wins the case, an estimated 8 million federal student loan borrowers would receive forgiveness automatically under the one-time cancellation plan.
However, borrowers can opt out if they prefer.