Student loans are meant to help college students pay for education expenses. But some people get the idea that they can use student loan funds for anything, like buying assets; this is a dangerous practice with many downsides.
Recently, surveys hit the news suggesting some borrowers are using their student loan money to invest in cryptocurrencies like bitcoin. This news invites questions: is it illegal to spend student loan money this way? What about using student loans to buy a house, or buying a car with student loans?
Can you use student loans for anything?
Some students wonder: is it illegal to spend student loan money? Using student loan money improperly may be a crime.
People convicted of financial aid fraud can end up in jail. These cases usually involve identity theft, though; if you can prove someone else compromised your identity and took out student loans in your name, you can have those fraudulent loans discharged.
So, is it illegal to spend student loan money on non-college expenses? It may be illegal as you could face legal action from the U.S. Department of Education if you are reported, and may even have to repay any subsidized interest.
>> Related: Top 10 Student Loan Mistakes to Avoid
Spending Federal Government Student Loans
If the loans are from a private lender with the U.S. Department of Education, you’ll have more strict rules to adhere to about spending student loan money. If you have a private lender, the tradeoff is typically higher interest rates (so you’ll owe more money later), with less rules about how you spend the student loans.
So, why shouldn’t everyone buy assets with their student loan money? What about buying a car with student loans? Or investing unused student loans after paying for education expenses? There are many dangers that make this practice a big mistake.
Even though someone isn’t likely to be prosecuted for someone who misuses their student loans, one can be reported to the Department of Education’s fraud hotline, run by the Office of Inspector General. That money can be taken back by the Department of Education, leaving the student holding a large bill that will need to be paid immediately.
Besides the possibility of having your student loans revoked by the Department of Education, misusing those loans has long-term financial repercussions. Student loans have reasonable interest rates, but they’re not as good as a typical auto loan or mortgage. Buying a car with a traditional auto loan is considerably less expensive than using student loan funds.
Even where student loans have a lower interest rate than other debt, like credit cards, there are significant disadvantages to that kind of debt that can follow you for a lifetime.
Student loans are practically inescapable. You cannot easily declare bankruptcy and walk away from student debt, no matter how bad your financial situation gets. While it’s possible in some cases to declare bankruptcy on federal student loan debt, it’s very rare and unlikely to succeed.
At credit.org, we do not provide legal advice, so anyone seeking bankruptcy should talk to a qualified attorney. But when it comes to student loan debt, the most realistic option you can hope for is to get some student loan counseling and ask for relief like a deferment or student loan forgiveness program.
In the meantime, student loan debt collectors will be free to pursue you—and they will—for years to come. You should strive to avoid these financial repercussions by ensuring your student loans aren’t misused.
Why you should only spend student loans on education-related expenses
Besides the potential legal and financial downsides, there is a moral aspect to student loan borrowing that should be considered.
Student loans are guaranteed, meaning you don’t have to demonstrate that you have sufficient income or creditworthiness to qualify.
Part of the deal is that the money is meant to be used for education expenses. Obviously, that includes tuition, books, supplies, etc. But it’s also expected that one will use student loans for “room and board,” and “transportation to and from school,” and that’s where things often go south.
Yes, you need a roof over your head and a cafeteria meal plan, but many students justify expenses like clothing, a new car, recreation… many expenses that they will spend decades paying for as they work to repay their student loans.
Using student loans to buy a house might satisfy the goal of keeping a roof over your head while you’re in school, but this is not the thing you borrowed the money for.
Another ethical issue has to do with the other students seeking a college education with you. Some financial aid and student loan programs are limited and awarded on a first-come, first-served basis. If you take those funds and use them improperly, someone else may not have gotten all of the funds they needed for their legitimate education expenses.
If you’re not prepared to use the student loan money as intended, you should let someone else do so.
An explosion of student loan debt
Even used appropriately, student debt has exploded over the past decade, leaving an entire generation mired in debt that threatens their future. It’s clear that every student needs to work to borrow less for school, not more, and that means keeping student loans focused on their intended purpose.
To quickly see how student loan debt has grown over the past decade, check out this shocking graph from the Federal Reserve Bank of St. Louis:
Every dime spent on something other than education expenses adds to that large mountain of debt, and the borrower will be dealing with it for many years after those purchases are forgotten.
How to ensure your student loans aren’t misused
If you have a sum of student loan money waiting to be spent, it can be tempting to use it more widely than you should. Take some advice on avoiding this trap:
- Use your meal plan, don’t dine out. Student life is very social, and many college students don’t want to miss out on time with friends. If you’re using student loan funds to go out to restaurants, or even worse, to pay for a spring break trip, then you’re making a big mistake. Let your student loan buy you a cafeteria meal plan and use it! It’s not worth years of debt to dine out with friends when your school will feed you for far less.
- Budget your money. Even if you don’t have a steady paycheck yet, you need to create a budget and stick to it. What funds you have need to last, and the only way to guarantee your success is to create a written budget. Learn how to budget and start tracking your spending now.
- Maintain healthy credit. Don’t miss any payments to your credit card company (try not to use credit cards at all!), and don’t be late paying for utilities, cell phone bills, etc. Any missed payment will be reported to the credit bureaus and make it more difficult and expensive for you to borrow for years to come.
- Study personal finance. No matter what your major is, you should include some kind of coursework in personal finance. Whatever electives you have to take should include some classes about consumer economics. You need to understand the principles behind credit & debt, and if you’re a student loan borrower, you’re already in the perfect place to learn.
- Don’t neglect other sources of income. Don’t let student loans cover everything. Are you applying for all of the grants and scholarships you qualify for? Is there a chance to work part-time or earn extra money during the summer? Even gifts from family should be included in your written budget. If you want to keep student loan debt minimized, then focus on supplementing those loans with other sources of income.
What do you do with excess aid?
If you find yourself with extra student aid after covering the cost of expenses, you can return those to your bursar’s office. You’ll not only reduce your debt, but you’ll avoid paying interest on any unnecessary unsubsidized loans. Returning excess aid is the wisest option.
Join us for our free upcoming webinars happening this year! For more details on these events and to register, please visit https://credit.org/events/
- October 28 – Surviving the Holidays
- November 18 – Understanding Credit Reports & Scores
- December 16 – Deals for Wheels