Buying a Car With Student Loan MoneyFebruary 4, 2022
As a college student, managing money on your own — and making decisions about what purchases to make — can be overwhelming. You may need a car to commute to school or work but may not have enough money saved to buy one. If you’re in that conundrum, you may be considering using some of your student loans to purchase a vehicle. However, buying a car with student loans isn’t just a bad idea, it can get you into serious trouble. Here’s how.
Can You Use Student Loans to Buy a Car?
When you take out a student loan, the lender sends the money directly to your school. Your college will use the money to cover your school-required expenses, such as your tuition and dorm fees. If there is money left over, the school will issue you a student loan refund for the remaining amount. Typically, the remaining student loans can be used for some living expenses.
What expenses can you use a student loan refund for? According to the Office of Federal Student Aid, allowable uses for student loans include:
- Tuition and school-required fees
- Books and supplies
- Room and board
- Dependent care
- Study-Abroad expenses
- Disability expenses
- Employment expenses for co-op study
- Loan fees
Because transportation is listed as an eligible expense, some people think that means that buying a new car with student loans is allowed. But the financial aid handbook is clear:
“[Allowable expenses include:] Costs for operating and maintaining a vehicle that is used to transport the student to and from school, but not for the purchase of a vehicle.”
The financial aid handbook makes it clear: buying a car with student loans isn’t permitted.
Learn More: Best Ways to Use Extra Student Loan Money
Is it Legal to Buy a Car With Student Loan Money?
If you’re considering buying a car, you may be wondering how student loans can be used and the legality of taking out a student loan for a car purchase.
When you take out a student loan, you must complete a master promissory note or loan agreement — contracts that are legally binding. In the terms and conditions sections of these contracts, the lender will detail permitted uses for the student loan.
There are potential consequences of buying a new car with student loans. If the lender finds out that you used the money for anything but school-certified expenses, they can require you to immediately have to repay the entire loan amount.
Misuse of funds can also be reported to the Office of Inspector General or your college’s financial aid office. It’s not common for those things to happen, but it is possible that the lender could take action against you.
Why Buying a Car With Student Loans is a Bad Idea
Besides violating a legal contract, buying a car with financial aid is a bad idea for several reasons.
- Student loans have long repayment terms
- Student loans have steep consequences if you miss payments
- Cars depreciate quickly
Still curious why buying a car with student loans is a bad idea? Here are a few more details about the drawbacks:
Student Loan vs. Car Loan Interest Rates
In general, student loan interest rates are higher than the interest rates on a car loan. That means, even if you’re borrowing the same amount of money, you’ll spend more in interest costs repaying a student loan than you would a car loan.
Student Loan vs. Car Loan Repayment Terms
Depending on the type of loan you take out and the payment plan you choose, student loan repayment terms can range between 10 to 20 years. By purchasing a car with a student loan, you could be repaying that car for a decade or more, meaning you could be making payments long after you sell or trade in the vehicle.
Car Value Depreciation
Student loans are intended to help you earn a degree, which will hopefully boost your earning potential. Unlike your degree, cars depreciate in value and will be worthless every time you drive them. Using student loans to buy a car may mean you’re making payments on something worth a fraction of what you paid for it.
You Don’t Want to Have Student Loans and a Car Payment
If you fall behind on a car loan, the lender can repossess your car to recoup their money. But if you fall behind on your student loans, lenders can take much more extreme measures, such as garnishing your wages or taking your tax refund.
Leasing a Car With Student Loans Isn’t Wise, Either
Since you know that buying a car with your student loans isn’t a good idea, leasing may seem like a good alternative. But under the guidelines of your contract, leasing isn’t allowed either. And, leasing can be expensive. Add in student loan interest rates and repayment terms, and leasing a car with your student loan refund can lead you into substantial debt.
Learn More: Leasing vs. Financing a Car
6 Alternatives to Buying a Car With Student Loans
If you need transportation to school or work, there are ways to save money and avoid using your student loan dollars:
- Use rideshare apps: With apps like Uber and Lyft, you can quickly get a ride to work or college. While you’ll have to pay for every ride, you don’t have to worry about expenses like gas or insurance.
- Consider car sharing: If you only occasionally need a car — for example, when visiting your family during school breaks — a service like Zipcar may be a useful option. You can rent a car by the hour or by the day, and it will be cheaper than insuring and maintaining your own vehicle.
- Research public transportation options: If your college is in a major city, you likely have public transportation options, such as trains or buses. Your school may also have other transportation services for students, such as campus shuttles, that reduce the need for your own vehicle.
- Ask your employer about a stipend: If you have an internship, some companies will give their interns a travel stipend to help with commuting costs.
- Add a co-signer to an auto loan application: If you need your own car, buy used. If you don’t have enough savings to buy a car in cash and need an auto loan, ask a family member or friend with good credit to co-sign the loan. It will help you get approved at a lower rate.
- Get a part-time job: If you work during the summers or a part-time job during the academic year, you can save money to buy a car outright. Use SnagAJob to find part-time jobs that are suitable for a college student’s schedule.
Getting a Car Loan as a College Student
Buying a new car with student loans isn’t a good idea, but it’s easy to understand the appeal. As a college student, buying a car can be challenging because it can be difficult to qualify for a car loan on your own.
A word of caution: While buy here, pay here dealerships exist, they charge astronomical interest rates and fees. You’d be better off saving your money and buying a used car from a reputable dealership or by securing your own financing through a bank or credit union.
If you need transportation, talk to your school’s residence life or commuter department to see what options are available.