Key takeaways
- Spending leftover student loan money on non-education related expenses violates the terms of your student loan.
- Purchases not permitted under student loan guidelines include vacations, vehicles, restaurant meals, home down payments, expensive electronics, clothing upgrades, and paying other debt.
- You may use your student loan money for any education-related expenses, including tuition and fees, books, room and board, computer and software, transportation and gas, child care expenses, disability services, professional development, and study abroad.
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When you apply for a federal student loan, the funds are typically 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. While it’s occasionally only a few hundred dollars, some students may receive thousands of dollars in extra aid. But that raises an important question: what should you actually do with that extra money? While it may be tempting to treat it like bonus cash, there are clear guidelines on how student loan funds can—and cannot—be used.
Is it illegal to spend student loan money on non-education purchases?
Many students want to know, “Am I actually allowed to spend this money however I want?” While it is not technically illegal to use leftover student loan money however you want, it does break the terms of your loan agreement and could be considered fraud.
When you borrow 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, with a list of approved purchases. If the Department of Education discovers that federal loan funds were spent on non-approved costs, they can take serious action, such as:
- They can cancel the loan agreement.
- They can demand immediate loan repayment.
- They can disqualify you from availing any federal financial aid in the future.
If you lose access to your aid, it could ultimately make college much more expensive for you in the long run.
What NOT to do with your student loan money
If you end up with more loan money than your school charges for tuition and fees, it can feel like extra spending cash. But student loan money is still borrowed money—and it comes with limits on how it can be used. Here are eight purchases that are not approved:
1. Booking a vacation
Maybe you are hoping to 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. Before you do so, consider these two things:
- This is borrowed money that you have to pay interest on. That means your vacation will cost you more than you think it will.
- You could be pushing yourself further into student loan debt. Vacations can become very costly very quickly, especially if you don’t watch how much you spend.
2. Buying a new vehicle
It’s easy to see the appeal of having your own car in college—no more relying on friends for rides or juggling bus schedules, plus the ability to take weekend trips. However, student loan money isn’t the way to get one. Transportation to and from college is an approved expense, but it is limited to travel by bus, train, or fuel for a vehicle you already own. Buying a new vehicle or even major car repairs are not approved expenses, so it is best to steer clear of using your loan for these.
3. Spending on dining out or take-out
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 leave you with less money for the expenses that actually matter. You’re allowed to use the loan funds for essential groceries or cafeteria meals, but not dining out for fun.
4. Putting a down payment on a new home
If you got a lot of extra student loan money and are considering putting it toward a down payment on a new home, pause. This isn’t a good idea for a few reasons:
- Student loan money is for covering education-related purchases, not long-term investments.
- Owning a home comes with costs that can create an unaffordable financial burden, such as a mortgage, property taxes, home insurance, and maintenance.
- You are using borrowed money that accrues interest, which means you could be paying interest on that down payment for years.
5. Purchasing expensive electronics
While you can certainly purchase electronics that are needed for your education, it’s advisable to exercise restraint. Hi-tech gaming computers, video gaming consoles, or large TVs are expensive and unnecessary. Not only are they not approved for student loan money, but they can also be impulse buys that leave you short on money.
6. Starting a small business
It may seem like a good idea to start a small business on the side with your 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. But, this is not an approved expense and there are several risks involved:
- You may not have as much free time as you anticipated to commit.
- The business may not make as much as you thought it would.
- Your academics could suffer, making it harder to get a job after graduation.
7. Updating your wardrobe
Everyone loves to freshen up their closet, but student loan money isn’t meant for clothes shopping. A fashion upgrade should stay on hold until after you’ve started earning money from a job.
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. However, the federal government keeps the cost of student loans low to put higher education within reach for students. You’re not allowed to use these low-cost loans to pay off other higher-cost debt.
What you can do with your student loan money
You may be wondering now what you can actually use your student loan for. Here’s an approved list of things you can spend your money on:
- Tuition and fees. The bulk of your loan generally goes towards tuition and fees first.
- Books and supplies. Textbooks are among the biggest expenses in college after tuition. If you want to save some money, look to buy them used online or from past students.
- Room and board. Many students choose to put their loan money 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 and software. Believe it or not, you can actually buy a new laptop and whatever software you need for school with your student loan money.
- Transportation and 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 related to your commute.
- 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. However, it is advisable to inform your college’s financial aid office in advance.
- Disability services. Students with any type of disability can use student loan funds to pay for specialized equipment or services that they need.
- Professional development. You can use the student loan funds to cover the cost of professional training programs, as well as certificates, licensing, and professional testing as necessary.
- Cost of study abroad. Although optional, 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 how to budget for later in life. While it may be tempting to use your student aid for vacations, cars, takeout, personal electronics, or other items, it could be detrimental to your future bank account, credit score, and savings. Spending that much of your loan can create unnecessary debt or extra interest.
Instead, use your student aid for tuition, school supplies, and emergencies. Return any unused money to the lender or consider turning around and using it to pay off your student 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 in your financial future.
Before taking out a student loan, consider all your funding options like scholarships, grants, and federal aid. Visit the Citizens Student Hub today to get started.
