The impact of student loan repayments on retail

On August 30^th, student loan payments will resume after a three-year freeze instated during the pandemic, posing yet another potential challenge for US consumers. Since March of 2020, payments and interest accumulation on most federal student loans have been paused. At a time of economic uncertainty, the interest-free payment pause provided immediate relief to millions with student loan debt. In the United States, over 43 million people hold more than $1.6 trillion in student loans. Prior to the freeze, borrowers were making average payments of between $200 – $299 per month.

Student loan repayments come on the heels of two years of high inflation in the United States. Inflation, however, is on a steady decline, cooling to 3% in June, its slowest pace in more than two years. Prices are falling in several categories including energy costs, airline fares, and used cars. Though core inflation, which looks at price changes in goods and services excluding food and energy prices, is still high at 4.8% compared to the Fed’s target rate of 2%. This is important to note as not all inflationary rates have the same impact, meaning as inflation slowly declines, consumers feel both the relief and the strain in different ways depending on personal finances and household income.

Despite macroeconomic pressures, consumers show increased optimism.

In June, consumer confidence increased to the highest level in nearly one-and-a-half years. A recent survey from Accenture shows growing optimism about consumer’s personal finances as well. According to the survey, a large majority – almost three quarters – expect their disposable income to rise or remain stable over the next year. In more than half of the 15 categories the survey looked at, more consumers said they expect to increase their spend, rather than reduce it. This keeps pace with the National Retail Federation’s projection that retail sales will grow between 4% and 6% in 2023, reaching between $5.13 trillion and $5.23 trillion in total.

We’re living in a tale of two economies. Consumers with discretionary funds have a buffer to cushion these economic headwinds, meaning they’re faring differently than those facing student loan debt or those without COVID piggybanks. Consumers without this cushion may feel more impact month-to-month, reallocate discretionary spend, or get savvier with their purchases. Though both consumers are prioritizing value.

How can retailers stay competitive?

In recent years, retail has proven to be flexible and able to adapt to succeed, weathering strong economic headwinds and changing consumer behavior. The question becomes, how can retailers continue to maintain their resilience?

1. Identify what moves and motivates your audience: The second half of the year brings the industry’s biggest annual retail events. Use these moments as an opportunity to understand what motivates your audience and adjust your strategies accordingly.

2. Make your offers strong: Don’t limit promotional offers to offloading old inventory. Retailers need to bring in the here-and-now to win today’s savvy shopper. Protect profit margins by offering cash back on full-price items, rather than deep discounting.

3. Stack incentives: To really be competitive, retailers are leveraging multiple strategies to attract shoppers. For example, Buy Now Pay Later (BNPL) and Buy Online Pick Up In-Store (BOPIS) have been popular add-ons to create additional incentivization for consumers.

4. Focus on long term value: Lean into your segment knowledge and invest your media and digital dollars accordingly. The most successful plans will understand how to hit the right balance between discounting and loyalty efforts. The strongest partners will be able to deliver both.

5. Reward loyalty: Focus your efforts on value-based rewards and promotions. For example, with Cash Back rewards, the more money consumers get back, the more likely they are to go back and shop and spend more.

6. Be customer-centric: Since existing customers drive most of retailers’ revenue, keeping them satisfied should be top priority. Brands should collect customer feedback to identify frictions that exist in the customer experience and explore new ways to fill those gaps.

We’ll be watching see how consumers respond as payments resume. As the story evolves, check back for more updates and insights