College is an expensive proposition for most students. High tuitions coupled with rising costs of living are increasingly putting students between the rock and a hard place of foregoing an education that can improve their financial lot in life and accumulating mountains of debt. Many students are trying to save money where they can, such as by living off-campus to save on rent and meals. But that means they need reliable transportation to commute to campus every day. A car that’s in good shape is much faster than most public transportation, but can you use student loans for car expenses?
The answer is a resounding “sort of.” Federal student loan guidelines permit the use of student loans for car expenses such as fuel and repairs, but explicitly forbid using student loans to purchase vehicles. Private student loans can be more permissive, but rolling the cost of a car into a student loan is not a wise financial decision.
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Here are three reasons not to use student loans for car expenses and what to consider instead.
3 Reasons not to Use Student Loans for Car Expenses
- Permissibility – As mentioned above, using your student loans for the purchase of a vehicle is explicitly forbidden, and trying to work around that rule could be a costly mistake. In the event that your violation was reported to the Office of Federal Student Aid your student loans could be revoked and you could even face jail time!
- Debt discharge – If you find yourself in the unfortunate position of being unable to cover the costs of an auto loan, you may be able to renegotiate your payments, and if not, your car can be repossessed, and your credit will take a hit. Even in bankruptcy it’s possible to renegotiate lending terms with auto creditors. If you used student loans for car buying, you’ll find it much more difficult to discharge that cost in the event of financial hardship.
- Loan repayment and depreciation – If you disregard the first two reasons and decide to go ahead and pay for a car with your student loans, you’ll be saddling your future self with the full cost of a depreciated asset. Federal student loan repayment begins after your grace period ends, six months after you graduate, withdraw from college or drop below half-time enrollment. If you attend a four-year university and decided to use your student loans for car buying, that means you’re now repaying the full sticker price of a car that’s now four years old. Couple that with the number of income-based repayment and deferral options, and you could find yourself paying for a car that’s practically worthless for a decade or longer.
3 Better Options than Using Student Loans for Car Expenses
- Alternative transportation – Depending on your university, you may be able to walk, bike or take public transportation to class. These are significantly lower-cost alternatives to buying a car and may even allow you to spend more each month on housing, which could put you closer to school and make these options more attractive.
- University commuter programs – Many universities have administrative offices dedicated to commuting services and parking. Depending on the school you attend you may be able to get assistance with using public transportation or finding ridesharing partners. Many schools backstop these services with on-campus shuttles or emergency ride services in the event that your ridesharing partner is unavailable. These services vary by university, so the first step is to reach out to that office to learn about your options.
- Pay cash – With vehicle reliability significantly improved over the last few years, it’s entirely possible to find a low-cost, well-maintained used car for a fraction of what you could expect to pay for a new car or one coming off a lease. Friends and family looking to move on from a well-loved car are a great option as they may be willing to settle for a lower price to avoid the hassles of a private sale. Students hoping to avoid using student loans for car buying can feasibly save for the cost of a used car by working during the summer, and parents or grandparents looking to help can offer incentives like matching the amount saved.
Using student loans for car buying or expenses is generally not a wise financial decision, and with a little effort and creativity, you or your student can make better choices that won’t be a burden for years down the line.
What commuting options are you or the student in your life using?