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You cleared the first hurdle. You have a student loan (maybe more than one). Now you need to put it to work: funding your education. What makes this interesting—and challenging—is that student loans are not only for tuition. The loans can also pay for a variety of expenses.That’s right. These funds can pay for textbooks and classroom resources and living expenses, which is the cost of housing and food while attending college or a career school. But there are other things that student loans should not be used to pay for.Learn more about the ins and outs of student loans for living expenses and other costs so you can navigate this terrain correctly.
What Are Student Loans?Student loans are borrowed money that helps cover the cost of higher education at a four-year college or university, a community college, or a trade, career or technical school. The majority of student loans come from the federal government. One source puts the percentage of undergraduates who borrow money from the federal government at 30%. Student loans also come from state governments, from private sources such as a bank or financial institution, and from other private organizations.Loans are often based on financial need but not always. The loans must be paid back over time, with interest, unless graduates qualify for loan forgiveness programs.Generally, your school will give you your loan money in at least two payments called disbursements. In most cases, your school must give you your grant or loan money at least once per term (semester, trimester or quarter). Schools that don’t use traditional terms such as semesters or quarters usually give you your grant or loan money at least twice—for instance, at the beginning and midpoint of your academic year or program.
Student Loan UsesThe amount of money you receive and how you receive it can depend on your financial need, the type of loan and the policies of your school. Federal and private student loans are disbursed to your college, rather than funneled to you directly. The school then takes out the money ear-marked for your education. In this context, education always includes tuition and fees and often includes on-campus housing. Sometimes money is left over after your aid is applied to your tuition, fees and other school charges. This remaining amount is called a credit balance. If you receive a credit balance, your school must pay this amount to you directly within 14 days unless you authorize the school to keep the money to pay for future institutional charges. When deciding whether to spend this additional money on something and you feel unsure, you can ask yourself, “Do I need this to allow me to attend college?” That is a good policy to guide you as you analyze student loan money for personal use.Here are some needs that get the green light for student loans:
College Tuition & FeesWhen people ask what can student loans be used for, the answer is definitely this. Your college will take the disbursement from the loan servicer to principally pay for your tuition and fees. They are the priority.The fees, in this context, are defined as licensing, certification or professional testing.
Rent & UtilitiesCan you use student loans for rent? Yes! Typically, along with your tuition and fees, your school will apply your loan money toward your on-campus room and board, which usually means dormitory housing and food. As for off-campus housing, federal loans can be used to pay for that too. The Free Application for Federal Student Aid (FAFSA) says that it’s permitted for you to use the money to pay for the cost of attending an institution of higher education—and that includes off-campus housing. Your loan won’t be sent to a private landlord, however. What happens is that after the tuition and fees are disbursed directly to the school, the credit balance will be sent to you and you may then use the money for renting an apartment and utilities.
Supplies for CollegeBooks, course materials and supplies are a critical part of your education. There are different ways for students to get loan money to pay for it, depending on your loan and your school.After your tuition and fees are paid for, and possibly your on-campus housing, the loan servicer will send the remaining money to you, and you can pay for books and supplies this way.The Department of Education advises students to ask their school’s financial aid office about getting funds for books “because it varies from school to school.” Some schools offer a special voucher for students to receive needed books and supplies through the school or its bookstore.
Living ExpensesFiguring out how to use your student loan for living expenses is especially important.Sources agree that money left in your credit balance can be used to pay for these essentials: groceries, toiletries, medication, linens and dishes.
Care for DependentsYour federal student loan can include your dependents. You should let your school’s financial aid office know this allowance should be part of your aid package.
Study Abroad ExpensesIf you pursue a semester or other period of study abroad, your student loan can be used to pay for education expenses.
Why It’s Important to Use Your Loan CorrectlyIf your lender finds out you misused student loan funds, depending on your lender’s policy, your current loan and any future loan possibilities may be canceled. You could be compelled to pay back the full balance of what you owe.The truth is there is not that much monitoring of student loans. But there is definitely a big downside to spending the money on things that don’t have anything to do with education.This is not free money. You will need to pay back your loan, sometimes over many years. For some people, these loan payments are a real burden. The average student loan debt figures are startling. The average federal student loan debt is $36,510 per borrower and private student loan debt averages $54,921 per borrower, according to recent data from Educationdata.org.With most students, the problem is they’re not receiving enough loan money to cover their tuition and expenses. Rolling in extra money isn’t too common. But after tuition, books and approved living expenses are deducted, there is sometimes some money left over.Experts say you should consider sending these leftover funds back to your federal or private student loan servicer as a loan payment. This will help you graduate with less student loan debt.
Common Ways People Misuse Student LoansMost of the incorrect uses for student loans are pretty obvious. Does anyone honestly think airfare to Florida for spring break is an appropriate way to spend your student loan? But in case there are some questions about how to spend the money, these are the usual misuses:
EntertainmentMovies, concerts, clubs, bowling, these are all entertainment costs that cannot be justified as educational uses.
Travel & VacationsIt’s both fun and beneficial to take a break, relax, travel and explore. But it isn’t helping you get an education. Don’t use your student loans to pay for vacations.
Down PaymentPutting a down payment on a home is not seen as an educational expense. As opposed to renting a place for the length of a semester, it could be your home for years after graduation or sold for a profit. That’s another reason that student loans shouldn’t be devoted to this.
Pricey PurchasesA big screen television, a bicycle or car, a home treadmill… These are not what student loans should go toward. If you can’t pay for these kinds of pricey items without digging into your student loans, you need to rethink the purchase now.
Business ExpensesIf you have a small business or other enterprise, you need to be careful about using money from the appropriate sources for funding it. Don’t dip into student loans. If you’re not sure about how to set up budget streams, it might be time to dig deeper into understanding small business expenses. And also time to explore other options in financing your debt.
Other DebtsIt doesn’t make sense to increase student loan debt, which is already the second-greatest source of debt to Americans after home payments, to cover your other debts, like credit cards or personal loans. Experts agree that if you see any way to decrease student loan debt, grab it. Don’t make it worse for yourself by robbing Peter to pay Paul.
Options When Student Loan Payments Become Too ExpensiveSometimes it’s impossible to keep up with your student loans. Whether it’s job loss or a change in life circumstances, some crises deal a heavy blow. The federal government has income-driven repayment plans to help reduce student loan payments. And depending on your choice of career, certain federal debt forgiveness programs can come to the rescue.
Student Loan Refinancing With LanternYou might be able to obtain a lower student loan payment through refinancing your student loan with a private company. You usually need a strong credit score to achieve a good deal on the payment amounts and length of loan. However, if you refinance, you will no longer be eligible for federal debt forgiveness.
The TakeawayBottom line: Student loans are intended to pay for your education: tuition, books and supplies, and on-campus housing primarily. Federal and private loan lenders usually send the money to your college. If there is money left over, it can then be sent to you as a credit. When it comes to what the credited money can pay for, focus on living expenses, including rent and food. Their purpose is serving your education needs. It’s important to not use the left-over money for things that clearly don’t: vacations, credit-card payments and pricey purchases.Once you are paying your loan back, you can refinance to get better terms. Learn more about the possibilities about student loan refinancing through Lantern. If you refinance, however, you will not be eligible for federal student loan forgiveness and other federal programs. Federal student loan payments are set to resume in mid-2023.
Photo credit: iStock/Orbon Alija
About the Author
Nancy BilyeauNancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.