Categories

Need help selecting a firm?

Tell us about your project and get introduced to the best accounting and tax firm for your needs.

Get Started

Qualified Student Loan

A “qualified student loan” is generally one used to pay qualified higher education expenses, i.e., tuition, room and board, and related expenses for attending post-secondary educational institutions, including certain vocational schools, and certain institutions offering postgraduate training. In addition, the expenses must be:

  • Incurred on behalf of the taxpayer, spouse, or any dependent of the taxpayer (at the time the loan is incurred), and
  • Paid or incurred within a reasonable period of time before or after the debt is incurred, and
  • Used for education when the recipient was an eligible student.

“Reasonable Period of Time” Safe Harbor

What constitutes a reasonable period generally is determined based on all the relevant facts and circumstances. However, qualified expenses are treated as paid or incurred within a reasonable period before or after the taxpayer incurs the debt if:

  • The expenses are paid with proceeds of a loan from a federal postsecondary education loan program; or
  • The expenses relate to a particular academic period and the loan proceeds used to pay the expenses are disbursed within a period that begins 90 days prior to the start of, and ends 90 days after the end of, that academic period. (Reg. § 1.221-1(e)(3)(ii))

A qualified education loan includes a debt used solely to refinance a qualified education loan. Thus, if a qualified student loan is refinanced for more than the original loan, and the additional amount is used for any purpose other than qualified education expenses, none of the interest paid on the refinanced loan is deductible because it then becomes a mixed-use loan. A qualified education loan doesn’t include any debt owed to a person who is related to the taxpayer within the meaning of §267(b) or §707(b)(1) (controlled partnerships). For example, any of the following loans would qualify so long as the proceeds were used SOLELY for the “qualified purpose” (i.e., mixed use loans don’t qualify).

06.02.01 - Loans Table

(1) But see “No Double Benefit” in this chapter

If a loan is not subsidized, guaranteed, financed, or is not otherwise treated as a student loan under a program of the Federal, state, or local government or an eligible educational institution, a payee (lender) must request a certification from the payor (borrower) that the loan will be used solely to pay for qualified higher education expenses. (Reg. 1.6050S-3(e)(2)) Form W-9S, Request for Student’s or Borrower’s Social Security Number and Certification, is provided by IRS for this purpose.

Capitalized Interest

Capitalized Interest is deductible as qualified education loan interest. Capitalized interest, for purposes of § 221, means any accrued and unpaid interest on a qualified education loan that, per the terms of the loan, is added by the lender to the outstanding principal balance of the loan.

Loan Origination Fee

A one-time fee charged by the lender when the education loan is made is deductible as education loan interest but must be amortized over the term of the loan as payments are made. To qualify as education loan interest, the loan origination fee must be for the use of money and not for services such as processing the loan. The loan origination fee does not have to be reported on Form 1098-E for it to be deductible over the loan’s term.

TaxBuzz Guides