Can You Use a Student Loan to Buy a Car?
Understand the financial implications and practicalities of using student loans to buy a car, alongside other common vehicle financing methods.
Student loans are financial aid designed to help individuals cover higher education costs, including tuition, fees, and living expenses. A common question is whether these funds can be used to purchase a vehicle. This article explores the eligibility and financial considerations of using student loan funds for transportation.
Student Loan Eligibility for Vehicle Expenses
Student loans cover “qualified education expenses,” including tuition, fees, books, supplies, and room and board. Transportation is also a qualified expense, meaning costs associated with traveling to and from school or for other necessary educational purposes can potentially be covered by student loan funds.
However, the inclusion of transportation as a qualified expense is generally limited to costs that facilitate a student’s education, such as commuting to classes, internships, or clinical rotations. It does not extend to the purchase of a luxury item or a vehicle for general personal use unrelated to academic requirements. Student loan funds are typically disbursed to the educational institution first for tuition and other charges. Any remaining balance is then released to the student to cover other allowed expenses. This refund represents the portion of the loan that a student could use for transportation, provided it aligns with an educational purpose.
Implications of Using Student Loan Funds for a Vehicle
Financing a vehicle with student loan funds carries significant financial implications. Student loans often feature long repayment periods (10 to 25 years) and accrue interest over time. For the 2025-2026 academic year, federal undergraduate loan interest rates are around 6.39%, graduate loans 7.94%, and PLUS loans 8.94%. Private student loan rates vary widely, from approximately 3.19% to 17.99%, depending on creditworthiness.
A vehicle is a depreciating asset, meaning its value decreases significantly over time. It also incurs ongoing costs such as insurance, maintenance, fuel, and registration. Using long-term student loan debt to finance a rapidly depreciating asset can result in paying substantially more than the car’s initial value over the loan’s lifetime. The total interest paid on a student loan for a car can far exceed what would be paid on a conventional auto loan, which typically has shorter repayment terms. This mismatch between the asset’s lifespan and the loan’s repayment period can create a disproportionate financial burden.
Common Vehicle Financing Methods
Beyond student loans, several common methods exist for financing a vehicle. Traditional auto loans are a prevalent option, typically secured by the vehicle itself. These loans usually have fixed repayment terms ranging from three to seven years. Interest rates vary based on credit score, vehicle type, and market conditions; for instance, in early 2025, average new car loan rates were around 6.73%, while used car rates averaged 11.87%.
Personal loans offer another financing avenue, providing unsecured funds for various purposes, including car purchases. Since these loans are not backed by collateral, their interest rates can sometimes be higher than secured auto loans, depending on credit history. Repayment terms for personal loans can also vary widely. Alternatively, some individuals use savings or cash to purchase a vehicle outright, avoiding debt or interest payments.