Federal Student Loans: Allowed Costs, Limits, and Misuse

You can use federal student loans for any expense that fits inside your school’s official cost of attendance. That budget, set by your school under federal law, covers tuition and fees, housing and food, books and supplies, transportation, dependent care, disability-related costs, licensing exam fees, and a modest allowance for personal expenses. Anything outside those categories is off limits, and when you signed your Master Promissory Note you agreed in writing to use the money only for education-related costs.¹

The Cost of Attendance Sets the Limit

Every federal loan you receive is capped at your school’s cost of attendance, a figure built from categories defined in federal statute.² Your financial aid award letter lists the dollar amount your school has estimated for each category. If a cost fits one of those categories, loan funds can pay for it. If it doesn’t, it isn’t an authorized use, no matter how reasonable it may feel.

Tuition and Required Fees

Tuition and the fees normally charged for a standard workload come first. Your school applies loan funds directly to your student account to cover these charges before releasing any leftover balance to you.³ That includes enrollment fees, lab fees, and program-specific charges like clinical placement costs for nursing students or workshop fees for engineering programs.

A mandatory health insurance premium charged to all enrolled students is treated as part of tuition and fees and can be paid with loan money.⁴

Housing and Food

Once tuition and fees are paid, remaining loan funds can go to housing and food. If you live on campus or use a school meal plan, those charges are deducted directly from your aid. If you live off campus, your school builds a standard housing and food allowance for your area, and you get the leftover balance as a refund to spend on rent, utilities, and groceries.

The off-campus allowance is capped at the school’s regional estimate. Pick housing that costs more than that, and you pay the difference yourself. Students who live with a parent still get an allowance — federal law requires it to be greater than zero — but it’s smaller than the off-campus figure.²

Books, Supplies, and a Computer

The cost of attendance includes an allowance for books, course materials, supplies, and equipment required for your program. It also covers the rental or purchase of a personal computer if your coursework calls for one.² Students in creative or technical fields can spend loan funds on things like cameras, art supplies, lab coats, or specialized software subscriptions, as long as a course requires them.

If your school has a contracted bookstore, you can give written permission for educationally related purchases to be charged directly to your student account.⁵

Transportation

Federal law puts a transportation allowance in the cost of attendance for travel between your campus, home, and workplace.² If you drive, that covers gas, insurance, parking permits, and routine maintenance. Bus fares, transit passes, and subway costs count too. Airfare home during breaks can also fall under this allowance for students who live far from school.

One firm limit: the transportation allowance cannot include the cost of buying a vehicle, whether new or used.⁴ The money is meant to keep transportation running, not to finance a car purchase. Program-required travel, such as conference trips or medical residency interviews, can also be included.

Dependent Care

If you have dependents, your cost of attendance includes an allowance for care expenses based on the number and age of those dependents.² It covers care needed while you’re in class, studying, doing fieldwork or internships, or commuting. The allowance isn’t limited to classroom hours; it extends to the full time your education requires.

The amount can’t exceed what is reasonable for the type of care in your community. Your financial aid office will usually ask for documentation, such as proof of enrollment in a licensed daycare or a signed agreement with a caregiver, before setting your figure.

Disability-Related Expenses

Students with disabilities can have additional costs added to the cost of attendance for services, personal assistance, specialized transportation, equipment, and supplies that are reasonably needed and not already provided by another agency.² A deaf student might use loan funds for sign-language interpreter services; a student with a mobility impairment might cover accessible transportation the school doesn’t provide.

A qualifying disability is a physical or mental condition that substantially limits a major life activity. Your school’s financial aid and disability services offices work together to set the allowance based on your documented needs.⁴

Licensure and Certification Fees

If your program prepares you for a profession that requires a license, certification, or credential to practice, the cost of attendance must include an allowance for those costs.⁴ Bar exam fees for law students, board exam registration for medical students, state licensing fees for nurses — all of that is covered, including exam fees, application costs, and the price of the credential itself.

The costs must be incurred during a period of enrollment, even when the exam takes place after that period ends. Schools may include costs for multiple exam attempts, though they can set a reasonable limit on how many attempts they will fund.

Miscellaneous Personal Expenses

For students enrolled at least half time, the cost of attendance can include a general allowance for miscellaneous personal expenses.² Your school sets the amount, and it covers small, routine costs of daily life during the academic year, such as toiletries and clothing. The Department of Education says this category can also include the cost of a prior-learning assessment, like a portfolio evaluation or credit exam.⁴ The allowance is modest by design.

What You Can’t Use the Money For

Spending outside the cost-of-attendance categories is not authorized. The Master Promissory Note is explicit: if you spend loan money on something unrelated to your education, the Department of Education can demand immediate repayment of your entire balance.¹ Common off-limits uses include:

Buying a vehicle. You can pay for gas, insurance, and maintenance, but purchasing a car, new or used, is excluded from the transportation allowance.⁴
Paying off other debts, such as credit card balances, car loans, or personal loans.
Entertainment and vacations, including concert tickets, recreational travel, and streaming subscriptions.
Business investments or startup costs, even if your field of study is entrepreneurship.
Luxury goods, including high-end electronics beyond what your coursework requires, designer clothing, and expensive furniture.

The rule is simple: if the expense doesn’t fit one of the cost-of-attendance categories your school used to build your aid budget, loan funds shouldn’t pay for it.

What Happens If You Misuse the Funds

The first risk is acceleration. The Department of Education can require you to repay your entire loan balance at once, not just the misused portion.¹ Defaulting on that accelerated balance costs you eligibility for further federal student aid and for most federal benefit programs.

Intentional misuse can also bring criminal charges. Under federal law, knowingly obtaining federal student aid through fraud or misapplying those funds carries a fine of up to $20,000, up to five years in prison, or both.⁶ Criminal prosecution of individual borrowers is uncommon, but the administrative consequences under the Master Promissory Note don’t require a criminal case to enforce.

1
Federal Student Aid. Master Promissory Note for Direct Subsidized Loans and Direct Unsubsidized Loans
2
Office of the Law Revision Counsel. 20 U.S.C. 1087ll – Cost of Attendance
3
eCFR. 34 CFR 668.164 – Disbursing Funds
4
Federal Student Aid. Cost of Attendance (Budget)
5
FSA Knowledge Center. GEN-12-21 Subject – Charges Incurred at Bookstores
6
Office of the Law Revision Counsel. 20 U.S.C. 1097 – Criminal Penalties