A German friend of mine used the term "Lotterleben" to describe to me someone as a "free spirit", although the dictionary translate the term as "dissolute lifestyle" which have a string negative meaning. I want to more of the usage of this term and it's etymology if possible.
Lotterleben definitely has a negative connotation and is used for a dissolute lifestyle (as you said). Depending on the views of the user of the word, this may include promiscuity, wasting the money of others (usually one’s parents), drugs, criminal activities, laziness, carelessness about one’s own concerns, untidiness etc. (basically everything associated with clichéic students).
The origin should be from or the same as Lotterbett, which describes a bed that is in an rickety, untidy or otherwise low-quality state, or lotterig which is an adjective describing untidiness, bad shape etc. in general. The part lotter itself is derived from Old German lotar, meaning flabby, loose, void, frivolous (see here).
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The term "Lotter" is still listed in Duden as a regionally used collquial German word for a tramp or vagabond. It is not used very often any more, but this was different as we can see from entries and quotes in the Grimm's Wörterbuch:
This indicates that there always was a negative connotation to "Lotter" which is also adherent to "Lotterleben" describing a dissipated, and somewhat disordered life style similar to that of a vagabond, or "Lotterbett" for a likewise bacchanal usage of a bed.
Note that regionally we may still find the expression "die Lotter", "die Lotterbank" for a lounge seated next to a stove used for casual hanging out.
According to Grimm the etymology of the Old High German lotar may share an common etymology with Old English loddere which became "to loiter" in modern English.