What tax form should my son receive to report private loan interest from a loan used to pay off education debt?

by James F. Hay, CPA | Nov 16, 2018
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My son has been paying his college loans since 2010. He was paying between 6 percent and 9 percent interest. A private loan was offered to him from February 2016 to the present. He is expected to have it paid off in roughly five years. My question is what is the tax form he is supposed to receive to claim the interest on this loan, a 1098-E? He has never received one to claim it. Can he still claim it for 2016 and 2017? His amortization schedule for this loan seems as if it is scheduled like a mortgage. Paying the most amount of interest at the beginning of the loan, instead of 3 percent each month. Is this a common practice?

Form 1098-E is the form that recipients of student loan interest must file to report the amount of student loan interest they received during the year, if the amount of interest received during the year was $600 or more. To be reportable by the recipient, a student loan must be either subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the federal, state, or local government, or of a postsecondary educational institution; or certified by the borrower as a student loan incurred solely to pay qualified higher education expenses. The recipient may use Form W-9S to obtain the certification.

With any loan that has level or equal payment amounts, the amount of interest in each payment will generally decrease over time, since the principal balance on which the interest amount in the payment is calculated will have been reduced with the application of the principal amount included in the prior payments.

I would refer the taxpayer to Chapter 4 of Internal Revenue Service Publication 970 - Tax Benefits for Education.

A caution on page 33 states: "If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you can't deduct any interest paid on the refinanced loan." 

This would seem to imply that as long as the proceeds of the original loans were used to pay qualified education expenses, as defined in the publication, and the proceeds from the refinancing (new) loans were only used to repay the original student loans, the interest on the new loan used to refinance the student loans, whose proceeds were used to pay qualified education expenses, would be deductible as long as all of the requirements were met, including the overall limitation of $2,500, the taxpayer's income limitations, among others.

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Answered by: James F. Hay, CPA, is an associate professor of accounting and business at Wilson College in Chambersburg, Pa.

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