Can I Use Student Loans to Buy a Car?
Considering a car with student loans? Learn about appropriate fund use, financial implications, and smarter alternatives for student transport.
Students often wonder if student loans can cover the cost of a vehicle while managing expenses during higher education. Student loans are specifically designated to fund education-related expenses, as defined by federal regulations and private lending agreements. This purpose guides how these funds can be utilized to support academic pursuits.
Understanding Student Loan Purpose
Student loan funds are intended to cover “qualified education expenses,” which include tuition, fees, room and board, books, and essential supplies. Transportation costs to and from school are also eligible, reflecting the necessity of commuting. However, this allowance does not extend to purchasing a vehicle itself. Both federal and private student loan guidelines align on this principle.
The U.S. Department of Education specifically prohibits including the cost of a car in a student’s cost of attendance. While student loans can cover operational expenses like gas or maintenance for a vehicle used for commuting, they cannot be used for car acquisition. Using funds for non-approved purposes can have serious repercussions.
Student Loan Fund Disbursement
Student loan funds are typically sent directly to the educational institution. This initial transfer covers direct charges like tuition and fees owed to the school. Schools receive these funds in scheduled disbursements, often at the beginning of each academic term. After the institution applies the necessary amounts for direct costs, any remaining balance is then disbursed to the student.
Students commonly receive these leftover funds as a direct deposit or via a check. While students have direct access to these remaining funds, this does not alter the legal restrictions on their use. These funds must be used for other qualified educational and living expenses, such as housing, groceries, or transportation to and from campus.
Financial Consequences of Inappropriate Use
Using student loan funds to purchase a car can lead to substantial financial burdens. Student loans accrue interest, meaning the total amount repaid will exceed the original borrowed amount. For the 2025-2026 academic year, federal undergraduate student loan interest rates are 6.39%, graduate student loans are 7.94%, and PLUS loans are 8.94%. Private student loan rates can vary widely depending on creditworthiness.
In contrast, average new car loan interest rates are around 7% and used car rates around 10.9%. While some car loan rates may be higher, student loans typically have significantly longer repayment periods, often 10 to 25 years, compared to average car loan terms of 5 to 6 years. This extended repayment means interest accumulates for a much longer duration, resulting in a considerably higher overall cost for the vehicle.
Student loans are generally not dischargeable in bankruptcy, except under an “undue hardship” ruling, which is difficult to obtain. This means debt incurred for a car with student loans would likely persist through bankruptcy. Misusing student loan funds can also negatively impact credit scores, making it harder to secure future loans. Intentional misuse for non-educational purposes can constitute fraud, potentially leading to immediate repayment demands, disqualification from future financial aid, or legal actions.
Practical Transportation Solutions for Students
Students needing transportation have several financially sound alternatives:
Public transportation, such as buses or trains, often provides cost-effective and reliable options. Many educational institutions offer discounted passes or direct campus access.
Ride-sharing services and carpooling with fellow students can reduce individual transportation costs.
For shorter distances, bicycles offer an affordable and healthy mode of travel.
Investigate campus resources, such as university-provided shuttle services or car-sharing programs, which can meet transportation needs.
If purchasing a vehicle is necessary, consider an inexpensive, reliable used car funded through personal savings or a dedicated, lower-interest car loan. Car loans are designed for vehicle purchases and typically have shorter repayment terms than student loans, allowing for quicker debt resolution. Budget carefully for transportation expenses, including fuel, insurance, and maintenance.