Can I Use My Student Loan to Buy a Car?
Considering a car purchase with student loan funds? Understand the true scope of student loan use and smarter vehicle financing options.
Many individuals wonder if student loan funds can be used for non-educational expenses, such as buying a car. Student loans are designed to cover higher education costs. Understanding their permissible uses, the nature of student loan debt, and typical vehicle financing methods clarifies this common inquiry.
Permissible Uses of Student Loan Funds
Student loan funds cover a student’s “cost of attendance” (COA), determined by their educational institution. This includes direct expenses like tuition and fees, plus indirect costs such as room, board, books, and supplies. The COA also accounts for transportation expenses for travel to and from school.
Permissible transportation costs generally refer to gas, public transit fares, or basic car maintenance. The U.S. Department of Education and private lenders do not consider direct car purchases a permissible expense. Using loan funds for such a large capital expenditure falls outside eligible educational costs and could lead to penalties or loan termination if discovered.
Characteristics of Student Loan Debt
Student loans are a significant financial commitment repaid over an extended period. Federal student loans typically have a 10-year standard repayment term, though many borrowers take 20 years or longer. Interest accrues on the principal balance, often from disbursement or after a grace period, increasing the total amount owed.
Federal student loan interest rates are fixed and set annually. For 2025-2026, undergraduate Direct Loans are 6.39%, graduate Direct Unsubsidized Loans are 7.94%, and PLUS Loans are 8.94%. Private student loan rates vary widely based on creditworthiness, generally ranging from 3.19% to 17.99% or higher. Discharging student loan debt through bankruptcy is difficult, requiring a stringent “undue hardship” test.
Common Vehicle Financing Methods
Individuals typically finance vehicle purchases through methods designed for this purpose, distinct from educational loans. Auto loans are a common option, provided by banks, credit unions, or dealerships. These loans are secured by the vehicle itself, serving as collateral for the debt.
Auto loan terms range from 36 to 84 months, with averages for new and used vehicles often around 68 to 72 months. Interest rates vary based on credit score, loan term, and vehicle type. As of early 2025, average rates were 6.73% for new cars and 11.87% for used cars.
Personal loans are another unsecured option for car purchases. Their interest rates range from 6% to 36%, depending on the borrower’s credit profile. Paying with accumulated savings is also a straightforward method to acquire a vehicle, avoiding loan obligations.