Can You Buy a Car With a Student Loan?

It is a common question whether student loan funds can be used to purchase a car. While student loans are primarily designed to cover educational expenses, students often consider them for a broader range of needs during their academic journey. This article addresses the practicalities and implications of using student loans for vehicle acquisition.

Understanding Student Loan Disbursement and Permitted Uses

Student loans are primarily intended to cover qualified educational expenses, which include tuition, fees, room and board, books, supplies, and other necessary costs associated with attending school. The funds are disbursed directly to the educational institution first to cover tuition and fees. Any remaining balance is then released to the student.

Once released, these funds are meant to cover reasonable living expenses during enrollment, such as housing, food, and transportation. While transportation costs can encompass travel to and from campus, this allowance does not explicitly extend to purchasing a vehicle.

Using these funds for a car is not their intended purpose. Regulations focus on supporting a student’s education and basic living needs. While practically possible, it deviates from the core intent of student financial aid.

Financial Considerations of Using Student Loans for a Vehicle

Using student loans to purchase a vehicle carries significant financial implications, making it inadvisable. Student loan interest rates are often higher than those for traditional auto loans. Federal student loans for 2024-2025 range from approximately 5.5% to over 8%, depending on the loan type and borrower status. In contrast, auto loan rates for borrowers with good credit are typically 6% to 10%, sometimes lower for new cars or excellent credit. This difference means a car financed with a student loan will accrue more interest over time, increasing its overall cost.

Student loans have much longer repayment periods, often 10 years or more, and potentially up to 25 years or longer. A car is a depreciating asset that loses value quickly. A new car can lose 20% or more of its value in the first year. This means you could be paying off a student loan for a car that is no longer functional.

Student loans are difficult to discharge in bankruptcy, requiring a showing of “undue hardship.” This contrasts with other types of debt, including auto loans, which may be more easily dischargeable. This non-dischargeability means debt for a depreciating asset will remain a long-term financial obligation. Adding a car purchase to your student loan debt significantly increases your overall debt burden, potentially impacting your ability to qualify for other loans or to save for retirement.

Student loan debt is considered an investment in human capital, theoretically leading to higher earning potential. Using these funds for an asset that rapidly loses value, like a car, diverts this investment from its primary purpose. This can undermine the financial benefits of the education itself by burdening the borrower with substantial debt for a non-appreciating asset that offers no return on investment.

Alternative Approaches to Vehicle Acquisition

For students needing transportation, several alternative approaches exist that are more financially sound than using student loan funds. One practical strategy involves budgeting and saving specifically for a used car. Purchasing a reliable used vehicle outright or with a modest down payment can help avoid long-term debt and high interest payments. Setting aside a portion of income from part-time jobs or summer employment can allow for this type of purchase.

Another option is to consider traditional auto loans, which are specifically designed for vehicle purchases. These loans typically have shorter repayment terms, often ranging from 3 to 7 years, and are secured by the vehicle itself. Because the car serves as collateral, interest rates can sometimes be more favorable than unsecured student loans, especially for borrowers with a good credit history. A shorter loan term aligns more closely with a vehicle’s useful life, meaning the car is likely to be paid off before its value significantly diminishes.

Exploring public transportation options, if available, can significantly reduce or eliminate the need for a personal vehicle. Many college towns and urban areas offer extensive bus, train, or subway systems that are often discounted for students. Carpooling with classmates or utilizing ride-sharing services for occasional needs can also provide cost-effective transportation without the burden of car ownership. These alternatives help students avoid the significant ongoing costs associated with owning a car, such as fuel, insurance, maintenance, and parking fees, which can collectively add hundreds of dollars to monthly expenses.

Another option is to consider traditional auto loans, which are specifically designed for vehicle purchases. These loans typically have shorter repayment terms, often ranging from 24 to 84 months, with common terms around 60 to 72 months. While interest rates vary based on creditworthiness, the average for new cars was around 6.73% and for used cars was about 11.87% in the first quarter of 2025, generally lower than many student loan rates. Because the car serves as collateral, interest rates can sometimes be more favorable than unsecured student loans.

Exploring public transportation options, if available, can significantly reduce or eliminate the need for a personal vehicle. Many college towns and urban areas offer extensive bus, train, or subway systems that are often discounted for students. Carpooling with classmates or utilizing ride-sharing services for occasional needs can also provide cost-effective transportation without the burden of car ownership. These alternatives help students avoid the significant ongoing costs associated with owning a car.

Beyond the purchase price, owning a vehicle involves numerous other expenses, including insurance premiums, fuel costs, routine maintenance, and unexpected repairs. There are also registration fees, taxes, and potential parking expenses to consider. Understanding these total costs of ownership is crucial when evaluating any vehicle acquisition strategy, regardless of the financing method. Prioritizing these less glamorous but necessary expenses can help ensure a sustainable transportation solution.