Dangers of using student loans to buy assets

Student loans are meant to help college students pay for education expenses. But some people get the idea that they can use student loan funds for anything, like buying assets; this is a dangerous practice with many downsides.

Recently, surveys hit the news suggesting some borrowers are using their student loan money to invest in cryptocurrencies like bitcoin. This news invites questions: is it illegal to spend student loan money this way? What about using student loans to buy a house, or buying a car with student loans?

In the most extreme cases, using student loan money improperly is a crime. People convicted of financial aid fraud can end up in jail. These cases usually involve identity theft, though; if you can prove someone else compromised your identity and took out student loans in your name, you can have those fraudulent loans discharged.

In cases where someone misuses their student loan funds for something not education related, there seems to be no legal enforcement, and borrowers can use student loan money any way they choose without fear of prosecution.

If it’s essentially legal to do so, why shouldn’t everyone buy assets with their student loan money? What about buying a car with student loans? There are many dangers that make this practice a big mistake.

Financial Repercussions

Even though there isn’t likely to be a legal prosecution for someone who misuses their student loans, one can be reported to the Department of Education’s fraud hotline, run by the Office of Inspector General. The Department of Education can take back that money, leaving the student holding a large bill that will need to be paid immediately.

Besides the possibility of having your student loans revoked by the Department of Education, misusing those loans has long-term financial repercussions. Student loans have reasonable interest rates, but they’re not as good as a typical auto loan or mortgage. Buying a car with a traditional auto loan is considerably less expensive than using student loan funds.

Even where student loans have a lower interest rate than other debt, like credit cards, there are significant disadvantages to that kind of debt that can follow you for a lifetime.

Student loans are practically inescapable. You cannot easily declare bankruptcy and walk away from student debt, no matter how bad your financial situation gets. While it’s possible in some cases to declare bankruptcy on federal student loan debt, it’s very rare and unlikely to succeed.

At credit.org, we do not provide legal advice, so anyone seeking bankruptcy should talk to a qualified attorney. But when it comes to student loan debt, the most realistic option you can hope for is to get some student loan counseling and ask for relief like a deferment or a student loan forgiveness program.

In the meantime, student loan debt collectors will be free to pursue you—and they will—for years to come. You should strive to avoid these financial repercussions by making sure your student loans aren’t misused.

Moral Hazards

Besides the potential legal and financial downsides, there is a moral aspect to student loan borrowing that should be considered.

Student loans are guaranteed, meaning you don’t have to demonstrate that you have enough income or creditworthiness to qualify. In exchange for that guarantee, student loans never go away until they’re repaid—you lose the option to declare bankruptcy, or any other option to avoid repaying your debt.

Part of the deal is that the money is meant to be used for education expenses. Obviously, that includes tuition, books, supplies, etc. But it’s also expected that one will use student loans for “room and board,” and “transportation to and from school,” and that’s where things often go south.

Yes, you need a roof over your head, and a cafeteria meal plan, but many students justify expenses like clothing, a new car, recreation, etc. Many expenses that they will spend decades paying for as they work to repay their student loans.

Using student loans to buy a house might satisfy the goal of keeping a roof over your head while you’re in school, but this is not the thing you borrowed the money for.

Another ethical issue has to do with other students seeking a college education with you. Some financial aid and student loan programs are limited, and awarded on a first-come, first-served basis. If you take those funds and use them improperly, someone else may not have gotten all of the funds they needed for their legitimate education expenses.

If you’re not prepared to use the student loan money as intended, you should let someone else do so.

An Explosion of Student Debt

Even used appropriately, student debt has exploded over the past decade, leaving an entire generation mired in debt that threatens their future. It’s clear that every student needs to work to borrow less for school, not more, and that means keeping student loans focused on their intended purpose.

To quickly see how student loan debt has grown over the past decade, check out this shocking graph from the Federal Reserve Bank of St. Louis.

Every dime spent on something other than education expenses adds to that large mountain of debt, and the borrower will be dealing with those financial repercussions for many years after those purchases are forgotten.

How To Make Sure Your Student Loans Aren’t Misused

If you have a sum of student loan money waiting to be spent, it can be tempting to use it more widely than you should. Take some advice on avoiding this trap:

• Use your meal plan; don’t dine out. Student life is very social, and many college students don’t want to miss out on time with friends. If you’re using student loan funds to go out to restaurants, or even worse, to pay for a spring break trip, then you’re making a big mistake. Let your student loan buy you a cafeteria meal plan and use it! It’s not worth years of debt to dine out with friends when your school will feed you for far less.
• Budget your money. Even if you don’t have a steady paycheck yet, you need to create a budget and stick to it. What funds you have needs to last, and the only way to guarantee your success is to create a written budget. Learn how to budget and start tracking your spending now.
• Maintain healthy credit. Don’t miss any payments to your credit card company (try not to use credit cards at all!), and don’t be late paying for utilities, cell phone bills, etc. Any missed payment will be reported to the credit bureaus and make it more difficult and expensive for you to borrow for years to come.
• Study personal finance. No matter what your major is, you should include coursework in personal finance. Whatever electives you have to take should include some classes in consumer economics. You need to understand the principles behind credit & debt, and if you’re a student loan borrower, you’re already in the perfect place to learn.
• Don’t neglect other sources of income. Don’t let student loans cover everything. Are you applying for all of the grants and scholarships you qualify for? Is there a chance to work part-time or earn extra money during the summer? Even gifts from family should be included in your written budget. If you want to keep student loan debt minimized, then focus on supplementing those loans with other sources of income.

There may be stories about student investors who managed to turn a profit using student loans to fund their bitcoin-buying sprees. Trust us, these are very rare exceptions; using student loans to buy assets is dangerous and wrong. And it’s not a mistake one can easily walk away from.

Talk to our financial counselors before making this kind of decision to be sure you are ready to get your student loan.

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