Can You Take Out a Student Loan for a Car?

Student loans are a specific type of financial aid designed to assist individuals in funding their higher education. These loans are primarily intended to cover various costs associated with attending college or university. Funds can be applied to direct educational expenses like tuition and fees, as well as other necessary costs such as textbooks, supplies, and living expenses.

Understanding Student Loan Disbursement and Use

Student loan funds are typically disbursed directly to the educational institution, prioritizing direct educational costs like tuition, fees, and on-campus room and board. After the school applies these funds, any leftover amount, often called a “refund” or “excess funds,” is disbursed to the student. This disbursement usually occurs around the start of each academic period. These excess funds are still intended for “qualified education expenses” within the institution’s Cost of Attendance (COA).

The COA is an estimated budget set by the school that includes direct and indirect costs. Indirect costs encompass living expenses like books, supplies, equipment, and transportation. Transportation costs within the COA are generally for travel to and from campus or for educational purposes, and may include allowances for gas, maintenance, and insurance, but not typically for the purchase of a vehicle itself. While institutions do not strictly monitor funds once disbursed, the underlying purpose of these loans remains tied to educational and related living expenses.

Financial Considerations for Using Student Loans for a Vehicle

Using student loan funds for a vehicle introduces significant financial complexities and long-term implications. Student loans, federal or private, accrue interest over time, meaning a car bought with these funds will cost far more than its initial price. Federal student loan interest rates for undergraduates are around 6.39% for 2025-2026, graduate students 7.94%, and PLUS loans 8.94%. This interest compounds over many years, potentially spanning a decade or more of repayment.

Student loans are generally not dischargeable in bankruptcy, except in rare cases of “undue hardship.” Debt incurred for a vehicle remains a long-term obligation regardless of future financial stability or the car’s condition. A car is also a rapidly depreciating asset, losing 20-23.5% of its value in the first year and approximately 60% over five years. This creates a mismatch where a long-term, non-dischargeable loan is tied to an asset that rapidly loses market value.

Acquiring a vehicle with student loan funds impacts a borrower’s future financial capacity. A higher student loan balance increases an individual’s debt-to-income ratio, hindering qualification for other significant loans like mortgages or business loans after graduation. Funds used for a car are also unavailable to reduce student loan principal, cover other essential educational expenses, or be invested, potentially leading to greater overall debt burden and reduced financial flexibility.

Exploring Other Vehicle Financing Options

For students needing transportation, several alternative financing options are more financially sound than using student loan funds. Dedicated car loans are secured loans designed for vehicle purchases, often offering lower interest rates than personal or student loans. Average auto loan interest rates in early 2025 were around 6.73% for new cars and 11.87% for used cars, depending on creditworthiness.

Personal loans offer another option, providing flexibility as they are typically unsecured and can be used for various purposes. However, their interest rates are generally higher than car loans, ranging from 12% to 36% or more, depending on credit score. Students can also earn money through part-time or summer jobs to save for a vehicle, allowing them to purchase it outright or make a substantial down payment, reducing or eliminating the need for a loan.

Beyond direct ownership, public transportation, ridesharing, or cycling can provide cost-effective alternatives, especially in urban or suburban areas with adequate infrastructure. Family assistance, if available, may also offer a more favorable financial arrangement than incurring additional loan debt. These alternatives help avoid the long-term financial entanglements of using student loans for a depreciating asset.