Student loans are back, and shops will feel it

Forty-three million Americans must start repaying federal student loans again on 1 October, ending a three-year pandemic holiday. Repayments will take an estimated $8 billion to $10 billion a month out of household budgets. The hit falls hardest on younger, middle-income borrowers, whose discretionary spending drove the post-pandemic consumer boom.

How the holiday ended

The pause began in March 2020 and was extended repeatedly under two administrations. Its end was settled this summer from two directions. The debt-ceiling deal in June wrote the restart into law, and on 30 June the Supreme Court struck down President Biden's plan to cancel up to $10,000 of debt per borrower, or $20,000 for those who had received Pell grants. Interest began accruing again on 1 September, on a stock of federal student debt worth about $1.6 trillion.

The administration has promised another route to relief, starting a slower rule-making process under the Higher Education Act that would be narrower and open to fresh legal challenge. None of it will reach borrowers before the first bills do. For budgeting purposes, households have to assume that the debt is theirs and the payments are due.

Less cash for the shops

The drain comes just as households have run through most of their excess savings and credit card delinquencies are rising. Retailers, clothing brands and casual dining chains that thrived on free-spending customers will see footfall slow almost at once. With wage costs sticky, their margins will struggle to absorb the lost sales.

The arithmetic is modest in aggregate and severe at the margin. Over a year the repayments add up to around half a per cent of American consumer spending, enough to shave growth but not, on its own, to cause a recession. The pain is concentrated on people early in their careers who spend a large share of their income on eating out, clothes, electronics and travel. Credit-card balances passed $1 trillion for the first time in the second quarter, which suggests many of these households were already borrowing to keep spending.

Several retailers flagged the restart as a risk on their summer earnings calls. Mid-market clothing and restaurant chains aimed at younger customers are most exposed, while discount and off-price retailers may pick up shoppers trading down. Landlords of shopping centres and the card issuers that finance discretionary purchases sit one step further along the same chain.

Where the money goes

The payments do not vanish from the economy. Most federal student loans are owned by the Department of Education, so the cash flows from households to the Treasury, trimming the amount the government must borrow in the bond market. That makes the restart a small fiscal tightening, similar in effect to a tax rise aimed at one age group. Spending by the young falls and the deficit narrows slightly, with no offsetting boost to anyone else's income.

The plumbing matters as well. Loan servicers laid off staff during the three-year pause and now face millions of borrowers who have changed address, bank or employer since they last paid. Long call queues and billing errors are likely in the first months. Those frictions will delay some payments, which softens the immediate hit to spending but makes the monthly data harder to read.

A cushion from Washington

The administration has softened the blow. A new income-driven repayment plan, known as SAVE, cuts monthly payments for lower earners, in many cases to zero, and a twelve-month on-ramp means missed payments will not be reported to credit bureaus or push borrowers into default. That reduces the risk of a wave of damaged credit scores, but it also means some borrowers will simply not pay, which eases the hit to spending at the cost of larger balances later. The cash drain may therefore arrive more gradually than the headline estimate implies, and this is the best argument that the damage will be contained.

Lenders will be watching the same households from the other side. A borrower who resumes student-loan payments has less room to service a car loan or a credit card, so card issuers and subprime auto lenders may see delinquencies rise even while student-loan defaults are held back by the on-ramp. That shifts part of the credit risk from the federal government, which owns most of the student debt, onto private lenders' balance sheets. Banks have already been adding to their loan-loss reserves this year as card delinquencies climbed.

What 2013 suggests

The closest comparison is the expiry of the payroll-tax cut in January 2013, which raised the tax on most workers' wages by two percentage points overnight. Consumer spending kept growing through that year, helped by rising house prices and steady hiring. The labour market today is similarly firm, which argues against predicting a collapse. The difference is that today's younger borrowers enter the adjustment with their pandemic savings largely spent and card balances at a record.

There is a monetary angle too. The Federal Reserve held rates at 5.25 to 5.50 per cent last week and signalled that it expects to keep them high well into next year. Consumers facing the restart cannot count on cheaper credit to bridge the gap, since card rates and personal-loan rates follow the Fed's policy rate closely. Other shocks are gathering at the same moment, including higher petrol prices this summer and the car workers' strike at the Detroit manufacturers.

The early evidence will come from monthly retail sales, card-spending data published by the large banks and the quarterly household-debt figures from the New York Fed. A government shutdown, possible from Sunday if Congress fails to agree funding, would pile a second squeeze onto the same months.

Student loan repayments amount to a multi-billion-dollar squeeze aimed squarely at younger shoppers, and retailers' results for the final quarter of the year will show it, with mid-market clothing and casual dining chains reporting the weakest numbers.