Target’s Stock is Downgraded Over Student Loan Repayments

Target's stock dipped in morning trading Monday after Wall Street analysts cut their ratings on the retailer's shares, citing a provision in the debt deal that passed Congress last week that will hit millennials particularly hard.

As part of the deal to raise the U.S. borrowing limit, lawmakers agreed to lift a yearslong pause in student loan payments imposed during the pandemic. Students will have to start repaying their debt after Aug. 30.

KeyBanc Capital Markets cited the resumption in student loan payments, and the resulting reduction in discretionary spending for many millennials, in downgrading Target's shares from overweight to sector weight.

"Our analysis suggests a sizable headwind from this policy change," KeyBanc analysts led by Bradley Thomas wrote in a research note sent to clients Sunday. They estimated roughly 27 million borrowers would have to pay between $400 and $460 a month once the repayments kick in.

JPMorgan analysts similarly downgraded the company's shares on Thursday, citing declining the student loan repayments among many issues that could potentially depress foot traffic heading into the critical back-to-school and holiday shopping seasons.

Target was not immediately available for comment.

"The policy change further elevates the risk for consumer discretionary spending, particularly for the 2023 back-to-school and holiday season," KeyBanc analysts wrote. Other retailers, notably Dollar Tree, Dollar General and Big Lots could also take a hit when student loan repayments begin this fall.

Target's shares fell by about 2% in morning trading. 

Target’s downgrade may reflect an upcoming downward trend in consumer spending among college-educated adults as their student loan payments once again put a dent in their wallet. Moody’s analytics chief economist Mark Zandi told CNBC in an interview last week the repayments will bog down consumer spending by a couple tenths of a percent.

This might not seem like a lot, but Zandi says that even slight changes in consumer spending can have a negative impact on an economy already strained by high interest rates and inflation.

“In a more typical time, that's not really that big a deal,” Zandi said. “The economy can digest that gracefully. But in the current environment where the economy is weak as it is, recession, risks as high as they are, a couple of tenths of a percent can matter.”

Americans owe a total of $1.8 trillion in student loan debt, according to Federal Reserve data. About 30% of all adults told the Fed they had some form of college debt — most being student loans — and the median amount loan amount owed was between $20,000 and $25,000.

The Supreme Court is expected to soon rule on a federal proposal to cancel up to $20,000 in student loan debt per person.