Can I use my student loans to pay for living expenses?

Student loans may be used to pay for anything included in the college’s published cost of attendance. The cost of attendance includes not just tuition and fees, but also living expenses, such as room and board, transportation to and from school, and books and supplies. In addition, the college’s financial aid administrator can increase the cost of attendance on a case-by-case basis to cover childcare costs for dependents and the cost of a computer and software.

Impact of Loan Limits on Borrowing for Living Expenses

Student loans are generally limited to the cost of attendance minus other financial aid received. Some loans, such as the Federal Stafford loan, have lower fixed annual limits. This may limit a student’s ability to borrow for living expenses. But other loans, such as the Federal PLUS loan and private student loans, aren’t as limited. For example, graduate and professional school students may use a combination of the Federal Stafford and Federal Grad PLUS loan to cover living expenses.

In most cases, the proceeds of a student loan are paid to the college, which applies them first to direct costs, such as tuition and fees. Any leftover money is then refunded to the student to pay for living expenses.

Based on data from the 2011-2012 National Postsecondary Student Aid Study (NPSAS), about a quarter of undergraduate students borrowed loans that exceeded tuition, after subtracting grants, by $2,500 or more.

Warning about Living Large on Borrowed Money

Federal student loans have lower interest rates than credit cards. But, borrowing to pay for living expenses, regardless of the form of financing, is a good sign that you’re living beyond your means. It is a short-term expense that results in long-term debt.

Don’t use student loans to live an expensive lifestyle. Live like a student while you are in school, so you don’t have to live like a student after you graduate. Student loans are not free money. They must be repaid, usually with interest. Every dollar you spend in student loan money will cost about two dollars by the time you repay the debt. So, if you use student loan money to pay for living expenses, it will cost you twice as much.

Instead, try to minimize borrowing. Total student loan debt at graduation should be less than your expected annual starting salary, and, ideally a lot less. If total debt is less than annual income, you should be able to repay your student loans in 10 years or less. If total debt exceeds annual income, you will struggle to make your monthly loan payments and may be in debt for 20, 25 or even 30 years. Minimize debt by going to a less expensive college and by minimizing living expenses.

Are You a Pell Runner?

A Pell runner (think “drug runner”) has no interest in getting a college degree, but rather seeks out student aid as a form of welfare. Pell runners typically enroll at low-cost colleges, such as community colleges, to maximize the refund after paying for tuition and required fees. Between the Federal Pell Grant and student loans, a Pell runner can net thousands of dollars a year.

The U.S. Department of Education is cracking down on Pell runners. The U.S. Department of Education is now using a risk-based model to select federal student aid applicants for verification and is implementing other tools to eliminate financial aid fraud. Congress passed legislation in 2012 to limit Federal Pell Grants to the equivalent of at most 12 academic terms. The 150% timeframe limitation restricts eligibility for federal student aid to 150% of the normal timeframe for degree attainment, such as 6 years for a 4-year degree. Common tricks for bypassing the 150% timeframe restriction, such as switching academic majors or colleges, may no longer be effective, as students with an unusual enrollment history are being flagged.

Remember, by filing the Free Application for Federal Student Aid (FAFSA), you certify that you “will use federal and/or state student financial aid only to pay the cost of attending an institution of higher education.” The penalties for financial aid fraud can include fines of up to $20,000 and up to five years in prison, or both, as well as being required to repay the student aid funds.