Can I Buy a Car With Student Loans?

Student loans are primarily for educational pursuits, covering tuition, living expenses, and other academic costs. A common question is whether these funds can be used for significant purchases like a car. Understanding their designated purpose is important before committing to such an expense.

Understanding Qualified Education Expenses

Student loans cover qualified education expenses. These include tuition, fees, books, supplies, and equipment. Room and board are also qualified expenses, provided they do not exceed the institution’s allowance for federal financial aid.

While some transportation costs are permissible, a clear distinction exists between commuting expenses and vehicle purchase. Funds can be used for gas, parking, or public transportation to campus. However, a car purchase is generally not considered a qualified educational expense by the U.S. Department of Education or the Internal Revenue Service (IRS).

Financial Implications of Using Student Loans for a Car

Diverting student loan funds to purchase a car can create significant long-term financial burdens. Student loans often carry higher interest rates than traditional auto loans. For instance, federal student loan rates for new loans disbursed between July 1, 2025, and June 30, 2026, range from 6.39% for undergraduates to 8.94% for PLUS loans. Average auto loan rates in Q1 2025 were around 6.73% for new cars and 11.87% for used cars, varying by credit score.

Using student loan money for a depreciating asset like a car means interest accrues on a non-educational expense. Student loans typically have longer repayment terms, often 10 to 25 years, compared to auto loans (3-7 years). This practice can limit future financial flexibility, impacting a borrower’s ability to save for a home, retirement, or other investments.

The tax deductibility of student loan interest can be affected if funds are not used for qualified educational expenses. Taxpayers can deduct up to $2,500 in student loan interest paid each year, provided the loan was used for qualified education costs. This deduction phases out for single filers with a modified adjusted gross income (MAGI) between $80,000 and $95,000, and for those married filing jointly with a MAGI between $165,000 and $195,000 for the 2024 tax year. If student loan funds are misused, the interest paid on the non-qualified portion may not be eligible for this deduction, potentially increasing the borrower’s taxable income.

Alternative Car Financing Options for Students

Students seeking transportation have several alternatives to using student loan funds. Saving money from a part-time job or summer employment can allow for a cash purchase, particularly for a used car. This approach avoids interest payments and prevents additional debt.

Traditional auto loans are another viable path, though students may need to build credit history for favorable terms. Lenders consider income, credit score, and credit history. Many students find success by applying with a co-signer, such as a parent or family member, who has a strong credit profile and stable income. Some financial institutions and dealerships offer specialized car loan programs for students.

For students who do not require car ownership, public transportation or ride-sharing services offer practical and economical solutions for daily commutes. These options can significantly reduce overall transportation costs, including fuel, maintenance, insurance, and parking.

Potential Repercussions of Misusing Student Loan Funds

Misusing student loan funds for non-qualified expenses, such as a car purchase, can lead to serious consequences. While direct audits by loan servicers or the Department of Education may not be common, they can request documentation of expenses. If a borrower is found to have intentionally used funds for purposes other than education, the non-qualified portion of the loan may be reclassified, resulting in immediate demand for repayment.

Beyond immediate repayment, borrowers risk losing eligibility for future financial aid, which could jeopardize their ability to continue their education. In severe cases, the misuse of federal student loan funds can be considered fraud under 20 U.S.C. 1097. This can carry substantial penalties, including fines of up to $20,000, imprisonment for up to five years, and restitution to the government. Defaulting on student loans due to misuse can also severely damage a borrower’s credit rating, impacting their ability to secure future loans.