Many college students use their student loans to pay for more than just tuition and fees. With the high cost of school and the rising price of living, it’s common for students to tap into their loan funds for everyday expenses. In some cases, they even use student loan money to buy cars, invest, or build a small nest egg.
While this might seem like a smart way to get through school, using student loans for non-educational expenses can lead to serious financial trouble down the road.
Student loans are designed to cover educational expenses. This includes tuition, school supplies, room and board, and other necessary costs related to attending college. In some cases, a portion of the loan may be used for transportation, like public transportation passes or basic commuting costs.
However, when student loan money is used for things like buying a car, making investments, or paying off other debts, it can quickly lead to problems. These loans were not meant to fund lifestyle upgrades or build personal wealth while in school.
Yes, you can use student loans for certain living expenses. This includes rent, food, and utility bills: basic costs that support your ability to attend school.
But some students stretch this definition too far. Using loan money to buy expensive electronics, take vacations, or make car payments can leave you with a larger balance and no long-term benefit. Worse, those borrowed funds come with interest, meaning you’ll pay more for these purchases over time.
The federal government and most private lenders do not monitor exactly how you spend the money. But just because you can use the money this way doesn’t mean you should.
The average college graduate leaves school with tens of thousands of dollars in student loan debt. When loan funds are used for non-education-related purchases, the total debt can grow much faster.
A new car may seem like a smart buy to help you get to school or work. But using a student loan instead of an auto loan may cost you more in the long run. Student loans often have longer repayment terms, which means you’ll be paying interest on that vehicle for years, even after it’s lost most of its value.
Some students hope to get a jump on building wealth and try to start investing with their student loan money. While investing early is generally a good idea, doing it with borrowed money isn’t the right path.
Here’s why it’s risky:
If you’re thinking about building your financial future while in school, start with budgeting and saving strategies, not borrowing to invest. Credit.org's budgeting tools can help.
When you borrow money for college, you’ll typically choose between federal student loans and private loans. Federal loans usually come with lower interest rates, flexible repayment options, and protections like income-driven repayment plans or deferment during hardship.
Private student loans, on the other hand, can have higher interest rates and fewer safeguards. They may also be more strict about repayment and may not offer the same grace periods. This makes the stakes even higher when using private loan funds for anything beyond school-related costs.
It’s important to understand exactly what kind of loan you have and how repayment will work. Before you get started, read our article on Top 10 Student Loan Mistakes to Avoid.
Let’s say you borrow $5,000 in student loans to cover basic transportation, and you end up repaying that loan over 20 years with interest. By the time the loan is fully paid off, you may have paid closer to $8,000. That’s $3,000 in interest on a purchase that didn’t build your future wealth or improve your education.
Paying more money than something is worth is a bad deal. And when that extra cost comes at the start of your financial life, it can create long-term burdens.
Some students justify using loan money for things they “need” to function, like a car, smartphone, or better housing. But there’s a difference between necessary living expenses and lifestyle upgrades.
For example:
If you’re unsure where the line is, think long-term. Will this purchase help you succeed in school and graduate? Or is it something you want today but won’t need tomorrow?
Using student loan money carelessly can lead to more than just debt; it can impact your credit. If you miss payments later, default on loans, or carry high balances on credit cards trying to compensate for poor planning, your credit report could suffer.
Poor credit can make it harder to rent an apartment, buy a car, or even get a job. Learn about credit reporting of student debt and protect your financial future by staying informed.
Rather than using loan funds to pay for cars, investments, or extras, there are safer ways to cover your expenses during college:
Being resourceful and avoiding unnecessary borrowing now will benefit your future self.
Just because the funds are available in your bank account doesn’t mean they’re yours to spend freely. It’s easy to see that extra balance and feel like you’ve gotten ahead. But it’s borrowed money; and with interest, you’ll pay more than you received.
Treat loan funds with the same caution you would with a credit card or personal loan. Ask yourself: Would I still buy this if I had to pay for it with cash right now?
Before any loan is disbursed, you sign a promissory note. This is a legal agreement that outlines your obligation to repay the money, including interest and fees. It’s important to read this carefully. It often states how the funds may be used, and how using them for non-educational purposes may violate the terms of the loan.
While enforcement of those limits is rare, you are still fully responsible for repaying every dollar, regardless of how it was spent.
One of the best tools students can use is financial education. The more you understand about personal finance, interest rates, debt repayment, and budgeting, the better choices you’ll make.
Explore free resources like:
Financial literacy helps you protect yourself, not just during college, but for a lifetime.
If you’re unsure about your loan repayment plan, investment ideas, or overall strategy, consider speaking with a financial advisor. While many charge a fee, your school may offer free or low-cost access to advisors through its financial aid office.
Credit.org also offers counseling services that can help you understand your debt and plan for a stable financial future.
Be aware of these red flags that suggest you’re mismanaging your student loan funds:
It’s never too early to course-correct. Seek help before repayment begins, and be proactive about understanding your loan terms and total cost.
Student loans can be a helpful tool, but they’re not free money. The choices you make today will affect your finances for years to come. Avoid using student loans for things that won’t add lasting value, especially items that quickly lose their worth or aren’t essential to your education.
Focus instead on living within your means, finding creative ways to meet your needs, and staying educated about your finances.
If you’re feeling overwhelmed by student debt or unsure how to plan for your financial future, we’re here to help. At Credit.org, we offer free credit counseling and specialized student loan counseling to help you understand your repayment options, avoid default, and create a plan that works for you.
Connect with a certified counselor today for personalized Student Loan Assistance.
