Is It Illegal to Spend Student Loan Money Outside of School?

Student loans have strict guidelines regarding how the funds can be spent because they’re intended to support educational pursuits. Federal and private lenders often define eligible expenses based on the school’s cost of attendance (COA) to ensure the loans are used responsibly.

Misusing student loans for non-educational purposes constitutes fraud and can have serious consequences. Understanding what’s included in your school’s COA is essential to avoid penalties and legal actions while making the most of your educational investment.

Is it illegal to spend student loan money outside of school? 

Federal and private student loans are intended to cover your educational expenses, typically defined by student loan lenders using the annual estimated COA for your selected school. 

Intentionally using student loan money for non-educational purposes constitutes fraud and is illegal. Misleading a lender about your intended loan use could result in legal consequences.

What am I allowed to spend student loan money on?

You’re generally allowed to spend student loan money on eligible educational expenses, as defined by your lender according to your school’s COA. 

The COA commonly includes allowable expenses such as:

• Tuition and fees: Direct costs paid to the school.
• Books and supplies: Textbooks, necessary course materials, and supplies (including buying or renting a personal computer).
• Transportation: The costs associated with operating and maintaining a vehicle, so long as the vehicle is used to commute to the program or for related activities (e.g., attending relevant conferences or participating in required residencies). 
• Living expenses: Reasonable costs associated with housing and food. 
• Other costs: Expenses for dependent care, licenses or certifications, study abroad programs, and disability-related needs might be allowable. 

Before proceeding with the student loan, consult your lender to ensure compliance.

What are student loan funds not allowed to be spent on?

You can’t use student loan proceeds for non-educational expenses. For instance, purchasing a vehicle is not considered an allowable transportation cost by the Department of Education (DOE) and would be excluded. 

Other examples of expenses you can most likely expect to be prohibited include the following:

• Vacations or unnecessary travel
• Luxury items or non-educational electronics
• Investments or paying off other debt
• Entertainment (e.g., Netflix subscriptions, gaming consoles)

If you’re unsure if a particular use is allowed, ask your student loan lender before proceeding. 

Ask the expert

Crystal Rau

CFP®

The line can get blurry if you combine your student loan proceeds with your other monies. It’s best to keep your student loan funds in a separate account so you can see how much you have left and what those funds are being used for.

What happens if I misuse my student loans?

Intentionally misusing student loans for prohibited reasons is fraud and can lead to:

• Immediate repayment demands: Lenders may require full repayment of the misused amount.
• Future financial aid ineligibility: You could be disqualified from future federal student aid.
• Legal actions: You could face federal prosecution or other lawsuits. Possible penalties could include monetary fines and a prison sentence.

Student loan fraud is a serious offense, and it’s essential to only use the funds for their intended purpose. Be upfront with your lender about how you plan to use the money. Always be truthful with your lender. 

If you need the money for another reason, many other financing options exist, such as personal loans, car loans, and mortgages. Taking the time to find the financing that’s right for your needs will serve you well in the long run.

Ask the expert

Crystal Rau

CFP®

If you find yourself without funds to pay for things such as entertainment and other activities considered to be more discretionary in nature, this is where a part-time job comes into play. If you find yourself relying on credit cards or personal loans, this is a red flag and a sign that you must cut back on discretionary spending.