Written By Joe Dyton
Federal student loans can help pay for your college education after you’ve exhausted other types of financial aid, like scholarships and grants. Unlike private student loans, federal student loans offer benefits such as income-driven repayment plans, fixed — and often lower — interest rates, and loan forgiveness.
In addition to being used for tuition costs, federal student loan funds can be used for other educational expenses. These funds must be put toward your education — spending the money on anything else could land you in legal trouble and saddle you with additional debt.
You can use this guide to help you avoid both of those undesirable outcomes. Here is what student loan funding can be used for — and what type of expenses you should avoid.
How to get federal student loans
Before exploring what student loan funds can be used for, it’s important to know how they’re disbursed. After you’re approved for a federal student loan and the loan amount is determined, your student loan funds are paid directly to your school.
The loan is first used to pay for your tuition, fees, room and board (if you’re living on campus), and other charges incurred through the school. Any remaining funds are returned to you but must be used toward education expenses.
What student loan funds should be used for
Education expenses include anything that’s directly tied to your schooling. Besides tuition and room and board, your student loan funds can go toward:
- Housing. You can use student loan funds to pay your rent if you decide to live off campus. Household items like furniture fall into this category too.
- Transportation. If you live off campus, you’ll need a way to get to and from school. You can use student loans to buy a car. It’s highly recommended you purchase something used rather than finance a vehicle that would require you to assume even more debt.
- School supplies. Appropriate supplies include course-related items, like textbooks, notebooks, pens, and bigger-ticket items such as a laptop that’s dedicated to your schoolwork.
- Food. You have to eat, right? Again if you live off campus, you can use student loan funds to pay for groceries or to dine out. Try minimizing expensive restaurant orders though — remember these are funds you’ll have to repay with interest, eventually.
What student loan funds shouldn’t be used for
It’s even more important to know what loans can’t be used for because, according to the Department of Education’s Office of Inspector General, theft or misuse of federal student aid can lead to fines and imprisonment.
Although schools don’t actively look for borrowers misusing student loan funds, they will report fraudulent spending to the U.S. Department of Education when discovered.
You can avoid these scenarios by not spending your student loan funds on nonessential items unrelated to your education like:
- Vacations. Sorry, student loan funds shouldn’t be used to pay for your spring break trip.
- Shopping sprees. Buying back-to-school clothes for yourself or holiday gifts for friends and family members is not an appropriate use of loan funds.
- Debt other than student loans. You shouldn’t use student loan funds to pay your credit card bills, mortgage, car note or other kinds of debt. If you have money left over when you finish school, it must be applied to your student loan debt.
- Entertainment. Consider any event that isn’t a school-sponsored — such as concerts, movies, plays and sporting events — off limits when it comes to your student loan funds.
- Investments. It might be tempting to throw some of your newfound money at Wall Street, but purchasing individual stocks with your federal student loan funds is prohibited. The same goes for investing in riskier ventures like cryptocurrency.
Leveraging student loan funds and forgiveness
It’s always in your best interest to take a simple approach to your federal student loan funds — only borrow what you need and only use the money for education-related purposes. This approach helps you minimize your student loan debt and eliminate any gray areas about what your student loans can be used for.
Student loan forgiveness could be a financial lifesaver if you overborrow or overspend and have difficulty repaying, however.
Student loan forgiveness is perhaps one of the biggest advantages of taking out federal loans versus private ones. Here are the student loan forgiveness plans to consider if you have trouble with your loan:
Income-driven repayment plans
Most federal student loans qualify for at least one of the four income-driven repayment (IDR) plans available. IDR plans set your monthly student loan payment at an amount that’s deemed affordable based on your income and family size. The federal government offers the following IDR plans:
- Revised Pay As You Earn (REPAYE): generally 10% of your discretionary income.
- Pay As You Earn Repayment (PAYE): generally 10% of your discretionary income but never more than the 10-Year Standard Repayment plan amount.
- Income-Based Repayment (IBR): generally 10% of your discretionary income for new borrowers on or after July 1, 2014, but never more than the 10-Year Standard Repayment plan amount. The IBR plan is 15% of your discretionary income if you’re not a new borrower on or after July 1, 2014. Your payment won’t be more than the 10-Year Standard Repayment plan amount, however.
- Income-Contingent Repayment (ICR): the lesser of 20% of your discretionary income and what you’d pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
These IDR plans’ repayment periods vary. REPAYE plan periods are 20 years if all of your loans were for undergraduate study and 25 years if any of the loans were for graduate or professional study.
The PAYE and ICR plans’ repayment periods are 20 and 25 years, respectively. The IBR repayment period is 20 years for new borrowers on or after July 1, 2014, and 25 years for returning borrowers on or after July 1, 2014.
Any remaining loan balance is forgiven if your federal students aren’t paid in full by the end of the repayment period for any of these plans.
Public Student Loan Forgiveness
You could have your student loan balance forgiven after about 10 years if you’re eligible for the Public Student Loan Forgiveness (PSLF) program.
PSLF requires you to be employed full time by a United States federal, state, local or tribal government or nonprofit organization. If you plan to work in the private sector, PSLF should factor into your student loan funding plans.
Along with the job requirements, you will have to make 120 qualifying monthly payments to be eligible for PSLF. Upon completing all of the requirements under the program, the remainder of your federal student loan balance is forgiven.
These student loan forgiveness programs might make it tempting to borrow more than you need, spend the funds on nonessential items, and then apply for IDR or PSLF in the future. But such a plan is ill advised.
For starters, federal student loan funds are never to be used for noneducational purposes, even if you plan to have part of the loan forgiven. Second, what if you fall off of the student loan forgiveness path or don’t qualify in the first place? You’ll find yourself in excessive amounts of debt with no way to get out of it.
Other ways to use extra federal student loan funds
It’s recommended that you only borrow what you need to cover your cost of attendance, but sometimes you end up with additional funds.
It’s not the end of the world if this happens to you, as long as you use those extra student loan funds responsibly. Here are few things you can do with extra federal student loan funds that will shield you from financial or ethical peril:
- Repay your student loan principal while you’re still in school: Most federal student loans will grant you a six-month grace period after you graduate before you have to begin repayment. Interest will accrue during that grace period, however. So, every little bit you can put toward your principal before you graduate reduces the amount that can accrue interest.
- Create an emergency savings account: It doesn’t hurt to have some money set aside in the event you need to get your car fixed, purchase a new computer for school or quit your part-time job to focus on school. If you never need to use the emergency account, you have a head start on repaying your loan.
- Return the money to the U.S. Department of Education: If you discover early on that you borrowed more money than you need for your federal student loan can return the money. You’re allowed to return excess funds and not be charged interest or fees if you do so within 120 days of the date the school disbursed the loan.
Managing your student loan funds
You can keep your student loan debt in check by borrowing only what you need. The more money you borrow, the bigger the financial aid amount you’ll have to repay, plus interest. Create and stick to a budget while you’re in school and track your spending so there are no surprises after graduation. Student loans are a great alternative to help pay for your education — just make sure you use them responsibly.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
