Is It Illegal To Spend Student Loan Money

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Technically, you’re only permitted to use student loan funds for eligible educational costs like tuition, books, and board. However, lenders rarely keep track of how you use the funds, giving you some leeway in how you can use student loans.

However, just because you have the option to spend your student loan money on things unrelated to your studies doesn’t mean you should. Spending loan money on nonessentials will result in more interest. If your lender learns that you misappropriated the funds from your loan, you might also suffer grave consequences.

Investing student loan money is not illegal. However, such investing does fall in a legal and moral gray area. Borrowers of government-subsidized loans could face legal action if they invest the money, which may include repaying subsidized interest.

What you can spend student loans on

According to the Office of Federal Student Aid and the majority of private student lenders, all loan funds must go toward one or more of the following educational costs:

Tuition and fees

Most lenders send your money directly to the financial aid department of your school to be used for your tuition and other first-time expenses. This usually happens at the beginning of each semester.

Your highest expense will likely be your tuition and fees, which can differ greatly between schools. According to the College Board, the average annual tuition at a four-year public college is $9,970 for in-state students while it is $34,740 at a four-year private college.

Room and board

Housing is covered by financial aid if you live in a residence hall on campus. Your financial aid office will apply your student loan funds directly to your housing bill. You can use the loan money to pay your rent, utilities, and renters insurance if you’re living off campus.

The “board” part typically refers to your meal plan. Your school will automatically deduct the costs of your meal plan if you choose one from your student loan funds. Most schools offer an unlimited meal plan in addition to more limited choices, and many demand that first-year students sign up for a meal plan.

Any remaining student loan funds will be returned to you once the financial aid office has paid for your tuition, fees, and room and board, if applicable.

The likelihood is that if you have a university meal plan, you’ll eat the majority of your meals in the dining hall at your college. However, if you’re not or if you require more snacks, you can use your student loans to pay for food. Making a weekly or monthly grocery budget could help you stay within your budget and prevent overspending.

When you have extra funds from your student loans in your bank account, you can use them to purchase college textbooks.

You should probably stay away from the school bookstore if you want to save money on textbooks. Alternatively, search for discounts from online booksellers, think about renting your textbooks, or purchase them used.

At the end of the semester, you can also sell your books to recover some of your costs.

For a college student, a computer or laptop is typically a necessary piece of equipment, so buying one is acceptable. If it’s reasonable, you may also use your student loans to pay for any additional materials or equipment required for your studies.

Study abroad costs

You can use the money from your student loans to pay for the costs of studying abroad if you intend to do so. These could include lodging, food, supplies, and other costs associated with your education.

Transportation to and from school

You could use your student loans to pay for gas, basic car maintenance, a transit pass, tolls, train tickets, or flights to and from home if you’re a commuter student or if you need to fly home for the holidays. Try carpooling with friends or using a bike instead of a car on campus to save money.

Child care expenses

Parents who must balance work and school can use their student loan money to pay for child care costs. However, unless you notify your school’s financial aid office in advance, child care is not automatically taken into account when calculating your cost of attendance.

Keep in mind that you are permitted to use loan money for any dependents you are responsible for, even if they are adults. Additionally, some colleges have daycare facilities on campus, while others provide referral discounts or coupons for childcare facilities nearby.

Don’t be afraid to use your student loan money for other expenses as long as they are necessary to help you get through the academic year.

For instance, you could use student loans for living costs and other expenses like…

  • Personal supplies, like toiletries and medication
  • Housing supplies, such as linens, dishes, toilet paper or a microwave
  • Other fees, like professional testing, certificates, licensing or additional training programs
  • Disability services, such as special services, equipment, transportation or extra supplies to ensure your success in school
  • What you shouldn’t spend student loans on

    Although it’s common practice to use student loan funds for living expenses, there are some purchases you shouldn’t make with them.

    In general, it’s best to refrain from using student loan money for anything other than education-related expenses, such as:

    Even though a spring break trip might be alluring, it’s probably not the best use of the money from your student loans. It doesn’t qualify as a qualified education expense, and it will cost more because interest will probably accrue on your debt.

    Using student loans to go on a shopping spree is not recommended unless you absolutely need a warm coat to get through the winter or another essential piece of clothing. If you’re a student living on a tight budget, think about shopping at thrift stores.

    Expensive drinks and meals

    Going out for drinks and meals at upscale restaurants can get expensive quickly. Avoid using your student loan funds for an expensive bar or restaurant outing to minimize your borrowing. This also includes getting takeout every night or buying pizza for your college friends.

    Down payment on a home

    Your student loans are intended to help you pay for your education, not to use as a down payment for a house. However, as long as your rent is within the range of what students at your school typically pay, using student loans to cover your monthly rent is acceptable.

    You shouldn’t use student loans to get a car, bike, electric scooter, motorcycle, or any other kind of vehicle. Even if you reside in a rural area and require it to travel to school, this still applies.

    Additionally, it’s generally not advised to use student loans for major auto repairs (gas and routine maintenance are acceptable, though).

    Even though you might be tempted, it’s risky to invest student loan money in a business. This expense is not only not authorized, but it also might result in heavy student loan debt that follows you for years after graduation.

    The only exception is if the cost is required for your coursework, such as when you need to incorporate an LLC to complete a master’s in business administration program.

    You are not permitted to use your student loans to pay for entertainment costs like Netflix, movie tickets, live concerts, museum exhibits, festivals, or school performances.

    However, you might be able to justify the cost if the event is related to your course work. If unsure, confirm with the financial aid office at your school.

    Wide-screen TVs and surround-sound stereo systems might make you the most popular student in the dorm, but (as you might have guessed) they are not permitted purchases.

    Even if you have extra money, it’s preferable to put it toward necessary living expenses to lower your potential student loan debt.

    You cannot use your excess student loan funds to pay off other debts like credit cards, personal loans, mortgages, or auto loans.

    This also includes paying for someone else’s education. There are a few exceptions, like paying for your child’s daycare while you’re in class (see above), though.

    Consequences of misusing your student loans

    Most likely, no one will be checking your bank account to make sure that you are using your loans for educational expenses. Because of this, some students use their student loans to purchase unnecessary items, which they later regret.

    In fact, a 2019 study by Student Loan Hero discovered that 26% of students had used student loan money for clothing and 20% for travel. Only 10% reported using student loan money exclusively for tuition.

    But before you spend money from student loans, consider whether you actually require it to graduate. Although you undoubtedly need a place to live, food to eat, and transportation to get to school, you may not necessarily need to spend a lot of money on entertainment, dining out, or trips with friends.

    Additionally, even though financial aid offices don’t actively monitor your use of student loan funds (or have the tools to track it), you could still face consequences for doing so. Although it’s unlikely, a lender could end your loan agreement and demand payment in full.

    And if you are unable to pay back the money, your credit score might suffer, which might affect your future ability to borrow money.

    Additionally, many schools only offer a small amount of federal financial aid, including federal student loans, to their student body. Overborrowing could result in fewer student loan funds being made available to a classmate in need.

    Returning extra student loan money you don’t need

    You should be aware that you don’t have to take out all of your available student loan funding. Consider returning any excess loan money right away if you have more than you require. Federal student loans can typically be canceled or returned within 14 to 120 days of disbursement without incurring fees.

    Returning unused funds as soon as possible will prevent you from having to pay interest on the amount. If you keep the money, you’ll probably have to pay back more than you borrowed.

    Make sure to factor in all expenses associated with your cost of attendance when estimating your budget, such as housing, food, a new laptop, and bus tickets, for example. Consider returning any excess funds from your student loan borrowing to the lender rather than spending them on non-essential expenses.

    Alternatives to using student loans for living expenses

    Although you can borrow money to pay for living expenses, you shouldn’t necessarily do so. Some alternatives to using student loans for living expenses include:

  • Getting a part-time job while in college. You can do this on your own or as part of a work-study program, if you qualify. While you don’t want to take too much time away from your studies, working during college could help you earn money and avoid borrowing too much in student loans.
  • Relying on your savings. You could draw on your savings account to cover living expenses if you’ve socked away money while working during high school or school breaks. At the same time, it’s wise to keep some money in your account in case of an emergency. Additionally, if you have a 529 college savings account, you can withdraw the funds tax-free for qualified educational expenses.
  • Applying for scholarships and grants. Look for opportunities to win scholarship money you don’t have to pay back.
  • Crowdfunding. If you’re experiencing financial hardship and need extra funds to help you through the year, consider launching a GoFundMe campaign or asking friends to donate via a Gift of College or UGift account.
  • Consider choosing (or transferring to) a less expensive school if you’re worried that attending college will cause you to accrue significant student loan debt.

    How to budget your money as a college student

    Living off student loans while engaging in bad spending practices can be detrimental in the long run. To help you control your regular monthly spending, think about making a budget.

    This entails keeping track of your spending, establishing spending caps for particular categories, and adjusting your budget as needed.

    Keep your student loan funds in a bank account that is distinct from your regular checking account because you might feel tempted to use them for anything.

    The main objective when taking out student loans is to use as little as possible, similar to any other debt. The more loans you use for non-educational costs, especially if they have a high interest rate, the more you might have to pay back.

    By restraining yourself from indulging, you’ll increase your future financial freedom. To make sure you’re not overspending, consider downloading a budget tracking app.

    Can you use student loans for anything?

    No, student loans aren’t a free-for-all spending spree. The U. S. Most private student lenders and the Department of Education provide a list of acceptable purchases and expenses, which typically includes tuition, room and board, books and supplies, study abroad costs, transportation costs, and child care costs.

    Can you use student loans to pay for your monthly car payments?

    While some transportation costs, like gas, bus fares, or train tickets, are allowable, buying a new or used car isn’t one of them. This includes paying a car loan on a vehicle you already own. You may need to find another source of income or a part-time job that pays enough to cover your car’s monthly payment in order to justify this expenditure.

    Can you use student loans to buy a house near campus?

    Unfortunately, student loans cannot be used to purchase real estate, even if doing so would give you a more secure place to live. However, you can use the money to pay for on- or off-campus housing as long as the cost is within the range that students at your school pay on average.

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    Can I spend my student loan on anything?

    The government forbids you from using student loans for any unauthorized purposes because they are intended to assist you in completing your education. The following are some examples of allowable costs: tuition, board, books, and computers.

    Can you go to jail for misusing student loans?

    Even though you won’t go to jail for using student loan money for things other than education, it could end up costing you in the long run.

    Is it illegal to use student loans to pay off credit cards?

    Making credit card payments with student loans is neither forbidden nor forbidden. It might, however, violate the terms of your loan agreement. In other words, it won’t land you in legal trouble, but it might cause problems with your lender.

    What happens if you misuse fafsa money?

    If the funding you received to assist with your education costs isn’t put to that use, you risk getting into legal trouble. If the school learns, they might file a complaint against you with the Department of Education. If anyone has information about fraud, waste, or funding misuse, they can call the Department’s hotline in confidence.