Technically, you are not allowed to use student loans to pay for a car. It is part of the loan agreement. But there is nothing stopping you from doing so, you just cannot ask for more loans to compensate.
I hope you guys are wrong about what you can use loans to pay off...I borrowed some money from undergrad and have been using the difference to pay off my car. I think the whole thing is just that you cannot ask for more money asides from what the school calculates costs to be. Why should they care if you spend your money on groceries, or a car payment, or a purse as long as you dont ask for more?