Student loan debt relief

IRS Provides Relief On Reporting Student Loan Interest: Borrowers May Use Reasonable Allocation

TDNR JS-1928, Notice 2004-63

The 1RS is giving lenders more time to customize their internal programming to report student loan origination fees and capitalized interest. Penalties for failing to report these items will be temporarily waived. Since the borrowers (usually the student or the student's parents) won't be receiving this information, the 1RS also offers guidance on what will be considered an acceptable estimate by them.

* Comment. Lenders had complained that they could not reasonably meet the 1RS's upcoming deadline for reporting these items, which borrowers use to determine their student loan interest deduction.

Information returns

Lenders generally must file information returns with the 1RS if they receive interest payments on one or more qualified education loans. Since 1998, the 1RS has issued and re-issued regs describing the reporting requirements of lenders. The latest regs were released in May. Under the 2004 regs, lenders are gen

erally not required to report payments of loan origination fees and capitalized interest for qualified education loans made before September 1, 2004. The rule changes for qualified loans made after September 1. Lenders must report loan origination fees and capitalized interest on qualified education loans made after September 1.

* Comment. Payments of interest, including loan capitalization fees and capitalized interest, are reported on Form 1098-E, Student Loan Interest Deduction.

Penalty relief

When the 2004 regs were announced, many lenders expressed concern that they would not be able to ascertain the necessary information within the requisite time. They explained that important programming changes would have to made to capture the information. In response, the 1RS will abate some penalties for failing to report payments attributable to loan origination fees and capitalized interest received in calendar year 2004 on loans made after September 1, 2004.

Penalties for failing to report payments related to loan origination fees and capitalized interest will not be imposed if lenders satisfy two conditions:

(1) Lenders must file Form 1098-E setting forth the amount of interest except for any loan origination fees or capitalized interest received in 2004 in Box 1 and not including a check in Box 2; and

(2) Advising borrowers that the amount of interest reported in Box 1 does not reflect payments attributable to loan origination fees or capitalized interest made on or after September 1, 2004. Lenders also must alert borrowers that their student loan interest deduction may be larger than the amount reported in Box 1.

The 1RS reminded lenders that Form 1098-E for calendar year 2004 must be filed by February 28,2005. Lenders filing Form 1098-E electronically have more time. Their filing deadline is March 31, 2005.

* Comment. The 1RS recently clarified the deductibility of student loan interest. To be deductible, a school loan must be incurred solely for higher education expenses. The expenses must be paid for within a reasonable time before or after a taxpayer takes on the debt. The maximum deduction for student loan interest is $2,500. Unlike other deductions, this one is not indexed for inflation.

Guidance for borrowers

In the interim, borrowers may use a reasonable method to compute deductible interest allowable under Code sec. 221. However, the 1RS warned that a method that results in the double deduction of the same portion of a loan origination fee is not reasonable.

References: FED ????46,773, 46,774; FTS ?¡ìP:3.170[2].