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• If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in the U.S. Department of Education's Federal Student Aid (FSA) programs. For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher educa- tion, a hospital, or a health care facility that offers post- graduate training. An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan isn't affected by the institution's subsequent loss of eligibil- ity. The educational institution should be able to tell you if it is an eligible educational institution. Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. • Employer-provided educational assistance. See chap- ter 10. • Tax-free distribution of earnings from a Coverdell edu- cation savings account (ESA). See Tax-Free Distribu- tions in chapter 6. • Tax-free distribution of earnings from a qualified tui- tion program (QTP). See Figuring the Taxable Portion of a Distribution in chapter 7. • U.S. savings bond interest that you exclude from in- come because it is used to pay qualified education ex- penses. See chapter 9. • The tax-free part of scholarships and fellowship grants. See Tax-Free Scholarships and Fellowship Grants in chapter 1. • Veterans' educational assistance. See Veterans' Ben- efits in chapter 1. • Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance. TIP Include as Interest In addition to simple interest on the loan, if all other re- quirements are met, the items discussed below can be student loan interest. Loan origination fee. In general, this is a one-time fee charged by the lender when a loan is made. To be deduc- tible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan. Loan origination fees weren't required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. If loan origination fees aren't included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding princi- pal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capital- ized interest is allowed in a year in which no loan pay- ments were made. Interest on revolving lines of credit. This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses, earlier. Interest on refinanced and consolidated student loans. This includes interest on a loan used solely to refi- nance a qualified student loan of the same borrower. It also includes a single consolidation loan used solely to re- finance two or more qualified student loans of the same borrower. 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 edu- cation expenses, you can't deduct any interest paid on the refinanced loan. Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains un- paid as of the date the payment is due, and fourth to the outstanding principal. CAUTION ! Chapter 4 Student Loan Interest Deduction Page 33