Having a car in college opens up more possibilities, including off-campus living, more jobs to add to your resume, and easy trips back home—and that’s what college is all about. There’s just one problem: Cars, like your education, are expensive.
You can take out student loans to pay for your education and transportation expenses, but what about a car? It is a transportation expense, after all—right? Despite that, federal student loans don’t allow you to use the funds to buy a car.
In other cases, you may be able to use student loans for a car. But it can be tricky, and we don’t often recommend it. Keep reading to find out whether you can use student loans for a car—and several backup options if not.
In this guide:
- Can you use student loans for a car purchase or lease?
- Can you use student loans to make car payments?
- Is it cheaper to use student loans for a car?
- Can you use student loans to pay for car repairs?
- Should you ever use student loans for a car?
- Does the decision change for purchase vs. lease?
Can you use student loans for a car purchase or lease?
Whether you can use your student loan money to pay for a car depends on which type of loan you have.
Federal loans
If you have federal student loans, the federal government dictates a series of rules about how you can and can’t use your student loan funds. You can find these rules in the Federal Student Aid Handbook. Chapter 2 includes these relevant tidbits:
“Allowable Costs
…
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.”
Note: The Federal Student Aid Handbook doesn’t mention car leases. But given its stance on car purchases, it’s wise to avoid it.
What could happen if you use your federal loans to pay for a car?
If your school disburses extra student loan funds to your bank account after settling your student bill, it doesn’t have any way to track what you spend the money on. So the chances of getting caught are low, but the stakes are high if someone reports you for fraud.
You’re committing loan fraud if you use your federal student loan funds for non-allowed purposes, including buying a car. That has legal consequences, and you could need to pay your loans back immediately and in full and even face jail time.
Private loans
Individual lenders offer private student loans and don’t follow all the same rules as federal loans. What you can and can’t spend your loan funds on depends on what’s in the contract you signed with your lender.
Check with your lender for the final word.
Note: Even if your lender allows it, you might want to reconsider it for several reasons, which we’ll get into below.
Can you use student loans to make car payments?
Again, it depends. The Federal Student Aid Handbook doesn’t forbid using your federal student loan funds for car payments as it does for a car purchase. But since payments are to purchase a car, it’s wise to assume this isn’t allowed for federal loans.
If you have private student loans, it depends on your loan agreement with your lender. Look for wording in your promissory note; if you’re unsure, reach out to your lender to ask.
Is it cheaper to use student loans for a car?
If you’re shopping for a loan—student, auto, or otherwise—it’s best to compare interest rates. The lower the rate, the cheaper the loan.
Many people are drawn to using student loans for a car. The rates on a student loan can be far cheaper, especially if, like many students, you don’t have the good credit and high income required for the best car loan rates.
However, student loans and car loans aren’t the same. You pay off student loans over a much longer time frame (usually a minimum of 10 years) versus car loans that you can pay off in as little as three years.
Since you’ll be paying off your student loans for longer than a car loan, you’ll often end up paying far more in interest overall, even though the rates are lower. Here’s what that might look like if you buy a $10,000 car with a student loan versus a car loan:
| Interest rate | Monthly payment | Loan term | Total interest paid | |
| Student loan | 4.99% | $106 | 10 years | $2,722 |
| Car loan | 10.00% | $323 | 3 years | $1,616 |
Keep in mind: You can’t take out a federal student loan just to cover the cost of a new car, so this example only shows how the portion of any federal student loans you use to (illegally) buy a car would compare with an auto loan.
If you used loan funds to lease a vehicle, you would have the added disadvantage of not owning it at the end of the contract.
Can you use student loans to pay for car repairs?
Let’s look at the Federal Student Aid Handbook again:
“Allowable Costs
…
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.”
Under this definition, as long as you’re not buying a car, you can use federal student loans to pay for fuel, new tires, service work, and repairs. This can come in handy if you’re driving an older-model car.
If you have private student loans, whether you can use that money for car repairs will again depend on the specifics of the contract you signed with your lender. Check your agreement or reach out to your lender to make sure.
Should you ever use student loans for a car?
- If you have federal student loans, it’s never worth using that money to buy a car. Your chances of getting caught might be low, but it’s illegal, and the consequences aren’t worth it.
- If you have private student loans, it’s often not worth using those funds to purchase a car. Even if your contract allows it, it’s more expensive over time than an auto loan.
Consider this downside: Student loans are much more challenging to discharge in bankruptcy than auto loans.
Everyone hopes they never need to file bankruptcy, but if you do, you’ll be glad to remove that additional debt.
If you’re frustrated by not being able to use your student loan money to buy a car, consider these alternatives:
- Use public transportation: Public transit networks around colleges and student-heavy neighborhoods are often well-developed.
- Car sharing and carpooling: Services such as Zipcar allow you to book a car as needed for occasional trips, or you may find someone to carpool with.
- Purchase an older used car: You may not need anything fancy while in school, and a good mechanic can help you identify a reliable car for an affordable price.
- Apply for a student auto loan: Some lenders (especially credit unions) may offer auto loans just for students.
- Apply for an auto loan with a cosigner: Qualifying on your own can be challenging as a student. A creditworthy cosigner might help you get a car loan.
- Talk to your school’s financial aid office: You’re not the first person to be stuck in a tight spot; they can help you sort out what’s allowed and your best options.
- Use Uber or Lyft for occasional short trips: It still costs money—but the infrequent rideshare is often cheaper in the long run, and you won’t need to deal with maintenance or repair costs.
Does the decision to use a student loan on a car change for purchase vs. lease?
Leasing a car is popular for people on a budget. It’s essentially a long-term car rental, and you return the car at the end of the contract. Since you’re not buying the car, it’s often less costly.
Information about whether you can use student loan money to lease a car is scarce.
The Department of Education forbids using federal student loans to buy a car, so it’s safe to assume the same applies to car leases.
It’s less clear regarding private loans, so check with your lender.