Can You Use Student Loans for a Car?

For students, loans often come to mind for educational and related costs. A frequent question arises regarding the possibility of using student loan funds to acquire a car. While student loans are designed to support educational pursuits, their application to vehicle purchases involves specific regulations and financial implications that warrant careful consideration. This article explores the intended uses of student loans, the financial consequences of diverting them for a car, and more appropriate financing alternatives.

Student Loan Eligibility for Expenses

Student loans, whether federal or private, are primarily intended to cover “qualified education expenses.” These expenses are broadly defined and typically include direct costs of attendance such as tuition and fees. They also encompass indirect costs like room and board, books, supplies, and equipment necessary for coursework. For instance, a laptop or specific software required for a degree program would generally be considered an eligible expense.

Beyond direct academic necessities, student loans can cover certain living expenses integrated into the school’s cost of attendance. This may include transportation costs to and from school, such as gasoline, bus passes, or parking fees. However, purchasing a vehicle is generally not considered a qualified education expense by federal or private lenders. While funds may be disbursed to the student after tuition and other direct costs are paid to the institution, using these funds for an unapproved expense like a car purchase could lead to issues, including potential termination of the loan or blocking of future disbursements.

Financial Characteristics of Student Loans for Car Purchases

Using student loans to buy a car presents several financial disadvantages compared to dedicated auto financing. Student loans typically have lengthy repayment terms, often spanning 10 to 20 years or more, which means a car purchased with these funds would likely be fully depreciated long before the loan is repaid. New cars, for example, can lose an average of 16% to 20% of their value in the first year and approximately 60% within five years. This rapid depreciation creates a significant financial mismatch, leaving a borrower paying for an asset that has lost most of its value.

Student loans can also accrue interest during periods of deferment or forbearance, particularly unsubsidized federal loans and private loans. This accrued interest can be capitalized, meaning it is added to the principal balance, leading to a larger loan amount and increased overall interest paid over the loan’s life. Federal student loan interest rates for the 2025-2026 school year range from 6.39% for undergraduate loans to 8.94% for PLUS loans, while private loan rates can vary widely, from around 3.19% to 17.95%, depending on creditworthiness. Student loans are generally difficult to discharge in bankruptcy, requiring a borrower to prove “undue hardship” through an adversary proceeding, a high legal bar.

Alternative Car Financing Options

Given the limitations and financial drawbacks of using student loans for a car, exploring alternative financing methods is prudent. Auto loans are a common and more suitable option, designed specifically for vehicle purchases. These are typically secured loans, meaning the car itself serves as collateral, which often results in lower interest rates compared to unsecured loans. Auto loan terms usually range from 36 to 84 months, with monthly payments that include principal and interest.

Average auto loan interest rates in the first quarter of 2025 were around 6.73% for new cars and 11.87% for used cars, though rates vary significantly based on credit score, with excellent credit potentially securing rates around 5.18% for new vehicles. Another option is a personal loan, which is generally unsecured and can be used for various purposes. Average personal loan interest rates can be around 12.49% for borrowers with a good credit score (e.g., FICO 700), but can range from approximately 6.5% to 36% depending on the lender and borrower’s credit profile. Saving cash and paying upfront for a vehicle or opting for less expensive transportation alternatives, such as public transit or ride-sharing services, are also financially sound strategies to avoid accumulating additional debt.