Can You Use Student Loans For a Car Purchase?

So you want to use student loans to buy a car. Can you do it? The answer is no, but if you keep watching this video I'm going to show you a hack where you could indirectly use student loans to buy a car probably that could lead you to want to buy a new Tesla or Mercedes. Stay with me because this is pretty complicated and we're going to show you some general car buying tactics and you know strategies you might use in a world where buying a car is pretty difficult thanks to the shortage that has happened from the pandemic. So first off, can you use student loans to buy a car? No. Why is that? The cost of attendance is the maximum that you can borrow for at any given school or program. The cost of attendance is going to show you all the direct expenses like tuition and fees as well as the indirect expenses like living expenses, room, board, etc. So why can't you take that money and go use it for a car? Well it's specifically prohibited with the federal student loan borrowing guidelines. So you just can't do it based on the guidelines. Now you could do it and not get caught. The problem is there's a federal student aid fraud reporting hotline that somebody could technically call and turn you in and if you were to get caught you could lose access to student loans as well as even theoretically face jail time in an extreme example. I personally never heard of somebody getting much less caught in the fraud hotline but much less sent to jail so I wouldn't particularly worry about that if you're trying to do things above board and operating in a gray area instead of a clearly prohibited area where you're just straight up intentionally borrowing to go spend money on a car. Don't do that. But let's just talk about car buying in general. First off, most people buy a car by leasing, financing, or paying cash. So maybe you're trying to finance your car and you're saying, well I can get a better interest rate through my student loans if I pay for it. Well you just kind of can't do that and it's not as cheap as you might think. Even people with relatively low credit scores can generally get a interest rate on their car loan that's going to be lower than what they're paying for their student loans. That's because the car is a secured loan whereas the student loan is an unsecured loan. Think about it like the repo man, right? If you don't pay your car loan, the repo man's coming for your car. There's no such thing as a repo man that can come for your brain, thank goodness. So a car loan generally is going to carry a lower interest rate than a student loan, so you wouldn't want to use student loans to finance a car purchase necessarily if you're just using traditional debt repayment strategies. Now for leasing, for paying cash, right, those are other strategies that people use to buy a car. Only 10% of people are able to pay cash for financing a vehicle, for purchasing a vehicle rather. And that makes sense because the cost of cars has really escalated quite a lot lately. It's partly because people are not really opting for small vehicles. They're really in mass buying bigger vans and SUVs especially, and so the average vehicle payment according to Experian has grown to about $5.54 a month. So it really is, you know, a lot more expensive to buy cars these days, and it's made even worse by the shortage that's come from the pandemic and the disruption to supply chains that's happened from that. So if you need to buy a car, here's a few tips. Number one, start saving now. You can actually buy a car that will get you around town safely for less than $5,000 cash. How do I know this? It's because I've done it personally several times. You generally want to find a vehicle that's less than 10 years old, has over 100,000 miles on it, and isn't something that's necessarily a status symbol by any means, right? So think a Nissan Altima, an old Toyota Camry, something with a ton of miles on it that's going to be reliable and safe to get you around town that you might not necessarily want to rent for a cross-country trip, right? Because if you think about it, the vast majority of your driving is in town, so you don't necessarily need a brand spanking new car that's extremely reliable with, you know, the latest cruise control techniques to just drive you around town. So if you're really not wealthy, that's a good option is to try to save up cash to buy something for less than $5,000. Now if you're saying, wait a second, I'm hauling around my kids, my family, that's my most precious asset, that's totally fine. One strategy you might use is doing the Craigslist approach. Now this is a little bit more challenging than it's been because of limited used car inventory from the pandemic, but in years past what you can do is look for a two or three year car that has got the latest safety features but has a little bit more miles on it. You could probably buy that vehicle for about 50% cheaper, and so if you could afford to come up with the cash to pay cash for that vehicle, you can get a really quality vehicle for, you know, a lot less money than you would pay if you went to the dealer. Now what about if you already have a fancy car and you really can't afford it and you want to try to see if you can get out of it? Well first you need to not be underwater. If you can get to the point where you're not underwater anymore, you might be able to sell the car online on a place like Craigslist and then turn around and trade down and pay cash for a cheaper car. Now the easier way to do that is to take that newer car to the dealer and trade down into something that's more affordable. In my experience, people have a lot of inertia and this takes a lot of effort, so most people aren't willing or interested to do that. Now you might have been offered a zero percent interest rate or a very low interest rate from a dealer before. How does that work exactly? So realize that the zero percent APR trick is really that. It's a trick. And why is that the case? Well you're buying something from the dealer which can artificially set the price to what they want to set it at, right? So for example, I can charge you let's say $40,000 with a zero percent APR or I could charge you $36,000 with a 10% APR, right? You know, you might work out at the end of the day those numbers might work out similarly from a profit perspective, but people look at the financing and the zero percent APR and think, wow, I'm getting such a steal of a deal. And that's what happens when you go to a dealer and you're not a math-oriented person is if you're not the math-oriented person then you're going to be the one that's going to get taken advantage of, right? One program that's also helpful that's benefited my own family if you're going to buy a new car is the Costco auto buying program. So we're able to just put in Costco's website what make and model of car we're looking for and then that gets us a significant discount off of the MSRP suggested retail price without any haggling. Basically, Costco does the haggling for us, which was pretty helpful instead of having to do that on our own. Now those are some different ways to buy cars. Now what if you said, I understand I'm not supposed to use my student loans for buying a car, but wink-wink, what if I want to try to do that while also complying with the applicable regulations and laws? So what I'm telling you is not telling you that you can use student loans to buy a car, but here's the reality. Money is fungible. Money is fungible. What does that mean? It means that you can use one pot of money for one thing and then another pot of money for something else, right? So for example, let's say you have some savings. Are you required to use that savings for paying for your student loans and your living expenses in school? The answer is no. You can borrow up to the maximum cost of attendance. Even if you have everything saved up in cash to pay for your degree, you can still borrow the maximum. So what people could do legally, by the way, is borrow the maximum cost of attendance instead of using money to pay for their education and take that money that would have gone into the educational expenses and use that to pay cash for a car instead. That doesn't violate the rules because that money is coming from your savings instead of from the student loan program directly. You see what I mean? So in other words, let's say you borrow the maximum cost of attendance and you're borrowing a little bit more than you need and you have some leftover money because your rent's a little lower and your, you know, money that you spent on groceries and everything is a little lower. Well, you could just argue that you're using all of that money to reimburse yourself for other expenses than using a separate pot of money to buy your car payment with to pay for your car. In general, that's kind of how it works. You can use student loans to buy a car indirectly but not directly. It's kind of like how the American Recovery Plan, the stimulus plan, put a prohibition on states using that money to invest in pensions and cutting taxes. Well, if a state does a workaround, right, where the state uses that money to replace other funds and then invests in pensions with a separate pot of money, you're basically doing the same thing with your own pot of money with deciding how you're going to buy a car. So I've certainly had a lot of people as clients of Student Loan Planner, because we're a big consulting firm for people who have a lot of student loan debt, they decided to max out their student loans and use separate savings to buy a car sort of indirectly having the student loan program cover their car for them. And when does this really make a lot of sense? If you're going for student loan forgiveness or public service loan forgiveness and your loans are going to be forgiven tax-free or you're just going to have a fraction of the cost of your student loans to have to deal with as a tax on your forgiven debt if you're in the private sector, then of course you'd want to borrow the absolute maximum. You want to have nothing holding back because you're going to get it forgiven anyway. And so if that's you, then certainly consider taking out the absolute maximum you possibly can. And at a minimum, the student loan money that you don't spend can just sit in your bank account as leftover money. And then perhaps you can just wait till graduation until you've got your degree officially and then you can go use some of those savings in your bank account to purchase a car with. So kind of a weird system, kind of a messed up system, but it is the way that it is. So now you know if you can use student loans to buy a car. Technically no, but now you know this gray area. Now that you know about this specific question, you can watch our next video about what you should be using your student loans for. Thanks for watching. I'm Travis from Student Loan Planner.