Is it illegal to spend student loan money? Even if it isn’t illegal, should you spend your student loan money on unrelated purchases? The big question is, are you allowed to do that? When you apply for a federal student loan, the funds are disbursed directly to your school. The school’s financial office deducts what it needs for tuition, fees, books, room, and board. If there are any funds left over, they will issue you a check or transfer it directly to your account.
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With private student loans, some lenders may transfer the funds to your school. Others may transfer the funds directly to your account to be spent on tuition, books, room, board, and fees.
In either case, you may receive a bit more than your tuition actually costs. While it occasionally will just be a few hundred dollars, some students may receive thousands of dollars in extra aid. It can be tempting to spend this unexpected windfall on purchases that are not related to school.
Here are a few things you should know about what you can and cannot do with your student loan money. We also cover the consequences of using those extra funds for things other than tuition.
What Not To Do With Student Loan Money
1. Book a Vacation
Maybe you join friends on spring break or you want to travel home to meet family. No matter what the reason, it can be very easy to justify dipping into your student loans to pay for vacations.
However, this may not be best use of your student loan money. Remember, this is borrowed money that you have to pay interest on. That means your vacation will cost you more than what you think it costs.
Secondly, you could be pushing yourself further into debt. Vacations can become very costly very quickly, especially if you don’t watch how much you spend.
2. Buy A New Vehicle
You’ve been waiting for so long to own a car of your own. Now, suddenly, you have the money to do just that. A new car sounds exciting and can also be easily justified – convenience on school days, rides for your friends, weekend trips. But buying a new vehicle with student loans is a really bad idea.
While transportation to and from college is an approved expense, it is limited to bus, train, or fuel for a vehicle you already own. Buying a new vehicle or even major car repairs are not approved expenses.
Besides, a new vehicle is an unnecessary purchase that will put you in the hole regarding your debt.
3. Spend On Dining Out Or Take-Outs
It may not seem like much, but home delivery, take out, and regular trips to restaurants can quickly add up. Every evening out can put a dent in your savings and eating out every day can over time cost as much as a new vehicle or a vacation.
Remember, that daily Starbucks breakfast and takeout pizza for dinner will cost you much more when you pay with student loan money. An occasional night out or home delivery is okay, but moderation really is key.
You’re allowed to use the loan funds for essential groceries or cafeteria meals but not dining out.
4. Put A Down Payment On A New Home
Got a lot of extra student loan money and considering putting a down payment on a new home? Don’t! This is absolutely the worst thing you can think of doing with the additional funds. It could put you in an unaffordable situation faster than you can imagine.
You can use your student loan funds to pay your monthly rent. That’s an approved expense. Putting a down payment on a new home isn’t.
5. Purchase Expensive Electronics
Approved electronic expenses include a laptop or computer and accessories but it’s advisable to exercise restraint. Don’t go and buy the most hi-tech gaming computer or video gaming console. They are expensive and unnecessary. And there’s definitely no need to look for the biggest TV you can fit in your dorm. Not only are these not on the approved list but in time they’ll also become the biggest drain on your time and money.
6. Start A Small Business
It may seem like a good idea to start a small business on the side with student loan money. After all, it will help you earn money while you’re still studying so you can pay back your student loans earlier. While theoretically, this may seem doable, there are too many risks involved.
As a college student, you may not have too much free time to commit to your business. Besides, the business may make you as much money as you thought you would. Last but not least, your academics will suffer, making it even more difficult to get a high-paying job after graduation. Above all else, this is not an approved expense. The risk is just not worth it.
7. Update Your Wardrobe
Unless it’s an absolutely necessary item of clothing such as a warm coat for winter, don’t consider upgrading your wardrobe with borrowed money. This is not on the list of permitted purchases.
While you’re in college, think, dress, and spend like a college student. Put the expensive wardrobe on hold until after you’ve started earning.
8. Pay Off Other Debt
Student loans have lower interest rates as compared to other types of loans such as mortgages, credit cards, personal loans, and vehicle loans. But these are not permitted expenses.
The federal government keeps the cost of student loans low to put higher education within reach of all Americans. You’re not allowed to use these low-cost loans to pay off other higher-cost debt.
Is It Illegal To Spend Student Loan Money?
There is no specific law that makes it illegal to spend student loan money. Ultimately, you can use the leftover funds any way you want to. However, you should be aware that you will pay a price in some way or the other.
When you take out student loans, you sign a loan contract. One of the clauses in the contract is that you agree to use the funds only for education expenses. The list of approved expenses will be included in the loan agreement.
If the Department of Education finds out that you’ve used federal student loan funds for non-approved purposes, they can take action. They can cancel the loan agreement, demand immediate loan repayment, and disqualify you from availing of any federal financial aid in the future. This can make the cost of college so much more expensive for you.
What You CAN Do With Student Loan Money
The list of approved expenses is not as restrictive as it sounds. There are a lot of things you can spend your student loan money including:
Tuition & Fees – Your school will apply any funds they receive towards tuition and fees first.
Books & Supplies – Textbooks are among the biggest expenses in college after tuition. To save money on textbooks, buy them used by past students or scour deals from online booksellers.
Room & Board – You can’t buy a new home with student loan money but you can use it toward rent and meal plans. If you’re living on campus in a dorm, the financial aid office will pay your housing bill directly from your student loan money. If you’re living off campus, you can use your loan funds toward your rent and utilities.
Computers & Software – Yes, you can buy a new laptop and whatever software you need with student loan money.
Transportation & Gas – If you commute to school from home or off-campus housing, you can use your student loan funds for your bus or train pass. You can also use the money to cover gas expenses and car maintenance. The only restriction is you can’t use the money to buy a new vehicle.
Child Care Expenses – If you’re a parent juggling college and younger kids, you can use the student loan money to pay for child care. To avoid getting into trouble, it’s advisable to inform your college’s financial aid office in advance.
Disability Services – Students with any type of disability can use the student loans funds to pay for specialized equipment or services that they need.
Miscellaneous Expenses – You’re allowed to use the student loan funds to cover the cost of professional training programs. You can also use the money to pay for certificates, licensing, and professional testing as necessary.
Cost Of Study Abroad – It may be optional but study abroad is a college-related program. If you’re planning to do one or more semesters in a college in another country, you can cover your study abroad costs using student loan money.
Why It’s So Important To Use Your Aid Responsibly
College is a great opportunity to learn to budget for later in life. While it may be tempting to use your student aid for vacations, cars, takeout, electronics, or other items, it could be detrimental to your future bank account, credit score, and savings. Spending that much of your loan creates unnecessary debt and, down the road, extra interest.
Instead of using your student aid for these things, keep it for your tuition, school supplies, and emergencies. Return any unused money to the lender or consider turning around and using it to pay off certain loans immediately. Use it to pay off unsubsidized loans that accrue interest from the first day of disbursement. It can save you thousands of dollars after you graduate and make a significant difference to your financial future.
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| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.50%-16.12%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
|
|
5.54% - 15.70% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
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4.63% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
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6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
 |
5.66% - 14.72% Variable
3.69% - 14.56% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
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5.62% - 16.85% Variable
3.69% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
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5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
