Sep 18, 2023 - Economy

Student loan repayment worries may be overblown

Illustration of a paper airplane made of a student loan bill, dollars and a page from a calendar

Illustration: Natalie Peeples/Axios

The resumption of student loan payments may not have the economic impact that some are fearing.

Why it matters: Retailers have been worried about a pullback in spending as due dates draw near. But the broader picture still points to a strong American consumer.

State of play: We're less than two weeks away from October, when federal student loan repayments will start coming due.

  • More than 43 million Americans have federal student loan debt.
  • Retail execs are fearful that as average payments of $200–$300 a month are made, they could miss out on over $100 billion worth of sales over the next year.

Yes, but: Even as excess savings have been dwindling and credit card balances have been on the rise, "more comprehensive measures of household finances remain unambiguously strong," including cash on hand and a surge in home equity, Sam Ro, author of the TKer newsletter, recently wrote.

  • Others expect any impact on spending to be muted.

What they're saying: There will likely be some slowing spending growth toward the end of the year due to the resumed payments hitting "certain households' ability to consume, but we do not think the end to the payment pause will be widespread enough to have a significant effect on overall U.S. household spending," Wells Fargo senior economist Tim Quinlan and his team wrote in a June note.

By the numbers: The amount of money saved during the hiatus is an almost negligible share of consumer spending — between 0.4% and 0.6% — on an annual basis, Quinlan estimates, per a WSJ report published over the weekend.

What to watch: "[Y]ounger Americans — those more likely to be impacted by student loans — are more likely to buy less apparel, beauty and skin care products and alcohol," when they have to make spending cuts, Jack Mackinnon, senior director of cultural insights at consumer research firm Collage Group, told Modern Retail.

  • "They also plan to shift to cheaper brands for groceries and home care like cleaning and laundry."

Thought bubble: Retail's woes may not translate into larger economic concerns.

  • A contained reduction in demand could actually help the Fed's fight to bring down inflation — perhaps helping policy makers stick a soft landing.

Go deeper: Student loan interest starts again Sept. 1. Here's what to know

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