What Can Student Loans Be Used For?
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- Qualified student loan expenses relate directly to attending college.
- Expenses like entertainment, travel, and clothing do not usually qualify.
- Students can send back unused student loan funds to debt and reduce payments.
According to the Urban Institute, 30-40% of U.S. undergraduates take out student loans each year, and 70% of these learners have educational debt by the time they graduate. Student loans play an important role in higher education, but not all students understand what these funds can be used for.
Keep reading to learn all about student loans and what they can — and can't — be used to cover in college.
7 Things You Can Use Student Loans For
According to the Internal Revenue Service (IRS), only qualified education expenses can be covered with student loans. The IRS defines these as "expenses for an eligible student that are required for enrollment or attendance at an eligible educational institution."
It's important that learners understand the difference between eligible and ineligible expenses before ever using the funds they receive. We look at seven approved costs below.
- Tuition and Fees: The full cost of college tuition and related fees can be covered by student loans since these directly correlate to the education a learner receives.
- Housing Expenses and Supplies: Housing is considered a required expense because learners must have a place to live. Student loans can be used to cover both on-campus and off-campus housing expenses.
- Meal Plans and Food Expenses: Whether a student chooses a college meal plan or purchases groceries to prepare food for themselves, these costs can be covered by student loan funds.
- Books, Supplies, and Equipment: Textbooks, notebooks, lab materials, laptops, and other required equipment for learning qualify as eligible education expenses.
- Transportation Costs: Transportation costs include the maintenance of a personal vehicle and the costs associated with taking public transportation.
- Study Abroad Costs: Degree-seekers can use student loan funds to cover the cost of qualified education expenses incurred while studying abroad.
- Childcare Costs: Especially helpful for nontraditional students, childcare costs fall under the category of qualified educational expenses since students generally cannot bring their children to class.
5 Things You Shouldn't Use Student Loans For
While learners can use student loans to cover a variety of expenses related to earning their education, there are plenty of items and experiences that do not qualify. Taking a summer vacation, updating your wardrobe, eating out at a restaurant, and going to the movies are all examples of expenses the IRS would consider unqualified.
Students should review the list below carefully to make sure they do not misuse their funds on unapproved expenses.
- Entertainment, Recreation, and Hobbies: Activities that students are not required to participate in cannot be covered by student loans. Examples include going to the theatre, buying a gaming console, or playing minigolf.
- New Clothes: Unless the new clothes will be used to give a class presentation, to take part in an on-campus interview, or for another qualified reason, student loan funds should not be used on a new wardrobe.
- Vacation Travel: Students should think again before using their student loans for a spring break trip, as these types of vacations do not qualify as an educational expense.
- Dining Out: While buying food and preparing it at home is seen as essential, eating out does not fit under this definition. Campus-based food providers are an exception.
- Buying a New Car: New cars are not seen as a requirement for higher education since they'll also be used for purposes outside school.
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What Happens If You Misuse Your Student Loans?
While examples of financial aid fraud prosecution have surfaced in recent years, the reality is that schools do not actively look for misuse. After depositing the approved student loan amount in students' accounts, colleges remain largely uninvolved.
That said, if a school discovers a student has committed fraud, the institution may notify its legal department for advice or report the student to the Office of Inspector General.
Accruing additional debt by misusing loans can spell trouble for students long after they graduate. In general, learners should try to keep their student loan debt as low as possible. When repaying these loans, borrowers must cover both the original loan and all accrued interest.
Frequently Asked Questions About Student Loans
Can you use student loans for rent?
Student loans can be used to cover rent for off-campus housing while a learner is enrolled in school on at least a part-time basis. They can also be used to cover campus-based housing for as long as the student is enrolled. Funds can cover other housing expenses, too, such as utilities and parking passes.
Can you use student loans to buy a house?
No, students cannot use their college loans to buy a house. While housing is considered a qualified expense by the IRS, it is not necessary for the student to own a home to have a place to live. Student loans should only be used to cover rent-based expenses. Additionally, student loans have significantly higher interest rates than mortgages, so using this money to buy a house would be a poor choice.
What happens to unused student loan money?
Unused student loan money can be returned to the U.S. Department of Education to avoid paying interest on those funds and avoid spending it on unqualified expenses. After budgeting for all eligible expenses (tuition, fees, housing, food, study abroad, etc.), students should send any remaining funds back to lessen their loan debt amount later on.
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