Do I need to take out a student loan to buy a new Prius?

Dear Penny,

Our Prius needs repairs. We trust our mechanic and the repairs are legitimate. It has over 170,000 miles and newer models get even better gas mileage. We currently have two cars, but since we mostly work from home, we don’t really need both. I thought we could consolidate and get a nicer Prius.

I was shocked to see that even a 2016 Prius costs around $18,000. The base model Prius Prime costs $28,500 and qualifies for a tax credit of $7,500. So $21,000 to buy a new Prius with electric capabilities, virtually zero miles and under warranty, with a negligible price difference over used hybrids.

In summary, once you factor in our trade-in values, your savings, and the tax credit, we would still need a loan of around $3,500. (I realize we’ll have to wait to get it back until we file our taxes.) I know it would be ideal to wait and save, but our Prius needs repairs now.

I am also an online student, but I pay for my studies with mainly grants and scholarships. Today I logged into my financial aid account to reject my student loan offers like I usually do and something caught my eye. It says the government pays the interest while you’re in school and for six months after. I have two years left. Basically, one could get an interest-free loan. I’m confident we could pay it off before the interest starts accumulating.

That sounds like a lot, but my inner frugality is anxious. Is it always a good idea to take out a loan? For reference, we are very responsible and have great credit as we always pay our bills and have a 100% success rate paying off loans early, even though we avoid them when we can. If it helps, it’s just me and my husband, and we don’t want kids.

-Thrifty student

Robin Hartil [ The Penny Hoarder ]

Dear Frugal,

I’m not of the school of thought that says all debt is terrible. Where it gets tricky is that you want to use a student loan to pay for the Prius. Student loans are based on your tuition fees.

The US Department of Education cost of attendance formula includes an allowance for books, supplies, transportation, and miscellaneous personal expenses. But the Federal Student Aid Handbook explicitly states that student loan money can be used for “the costs of operating and maintaining a vehicle used to transport the student to and from school, but not for transportation. ‘purchase of a vehicle’.

In your case, the use of student loan money for transportation costs is particularly murky. You’re an online student, so probably you’re not commuting to and from campus.

Track trends affecting the local economy

Track trends affecting the local economy

Subscribe to our free Business by the Bay newsletter

We’ll break down the latest business and consumer news and information you need to know every Wednesday.

You are all registered!

Want more of our free weekly newsletters in your inbox? Let’s start.

Explore all your options

There is, however, an obvious workaround. You can take out a student loan and use it to pay for eligible expenses, such as tuition and supplies not covered by your grants and scholarships, housing, and groceries. I’m guessing those costs will add up to over $3,500. Then you will free up money in your budget for car payment.

Realistically, you can’t determine whether you’re spending student loan funds or money from other sources of income once the student loan is deposited into your bank account – unless, of course, you open a separate account for student loan disbursements. But the fact is, as long as you don’t borrow more than your tuition, minus grants and scholarships, you shouldn’t be breaking any rules.

In the unlikely event that your scholarships and grants cover all of your tuition, you could still get a $3,500 personal loan. Since you have good credit and it’s a small amount, you wouldn’t pay too much interest.

If you’re sure you’re buying the Prius, don’t wait too long. Once a manufacturer sells 200,000 electric vehicles, credit eligibility begins to disappear. Toyota recently passed the 200,000 vehicle milestone, so barring any legislative changes, this $7,500 tax credit will be reduced to $3,750 on October 1.

Also keep in mind that EV tax credits are non-refundable, meaning the credit only applies to money you owe at tax time. For example, if you had an EV credit of $7,500 but only owed $2,000, you would clear the tax bill for $2,000 but not get a refund of $5,500.

It’s not just tax credits. You have clearly done the math and determined that this purchase makes sense. There’s no point investing money in repairs to a vehicle you’re planning to get rid of.

A loan is a bad idea when you use it to buy a lifestyle you can’t afford. But it is not the case here. As long as you don’t break the rules of the Ministry of Education, I see nothing wrong with taking on this small amount of debt.

• • •

Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected].

Dorothy H. Lewis