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Example. In August 2020, Peg took out a $10,000 stu- dent loan to pay the tuition for her senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2020 through October 2021) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a pay- ment of $200.51 due on the first of each month, beginning November 2021. Peg didn't receive a Form 1098-E for 2021 from her lender because the amount of interest she paid didn't re- quire the lender to issue an information return. However, she did receive an account statement from the lender that showed the following 2021 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but un- paid interest). Payment Date Payment Stated Interest Principal November 2021 $200.51 $44.27 $156.24 December 2021 $200.51 $43.62 $156.89 Totals $401.02 $87.89 $313.13 To determine the amount of interest that could be de- ducted on the loan for 2021, Peg starts with the total amount of stated interest she paid, $87.89. Next, she allo- cates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that Peg qualifies to claim the student loan interest deduction, she can deduct $401.02 ($87.89 + $10 + $303.13). For 2022, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. She will also apply the remaining amount of capitalized interest ($625 − $303.13 = $321.87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as inter- est for tax purposes. Don't Include as Interest You can't claim a student loan interest deduction for any of the following items. • Interest you paid on a loan if, under the terms of the loan, you aren't legally obligated to make interest pay- ments. • Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. • Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the NHSC Loan Repayment Program) or certain other loan repayment assistance programs. For more infor- mation, see Student Loan Repayment Assistance in chapter 5. When Must Interest Be Paid? You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. Can You Claim the Deduction? Generally, you can claim the deduction if all of the follow- ing requirements are met. • Your filing status is any filing status except married fil- ing separately. • No one else is claiming you as a dependent on his or her tax return. • You are legally obligated to pay interest on a qualified student loan. • You paid interest on a qualified student loan. Claiming you as a dependent. Another taxpayer is claiming you as a dependent if he or she lists your name and other required information on page 1 of his or her Form 1040, 1040-SR, or 1040-NR. Example 1. During 2021, Josh paid $600 interest on his qualified student loan. Only he is legally obligated to make the payments. No one claimed Josh as a dependent for 2021. Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2021 Form 1040 or 1040-SR. Example 2. During 2021, Jo paid $1,100 interest on her qualified student loan. Only she is legally obligated to make the payments. Jo's parents claimed her as a de- pendent on their 2021 tax return. In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2021. Interest paid by others. If you are the person legally ob- ligated to make interest payments and someone else makes a payment of interest on your behalf, you are trea- ted as receiving the payments from the other person and, in turn, paying the interest. Example 1. Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported on her Form W-2, box 1. Assuming all other qualifications are Page 34 Chapter 4 Student Loan Interest Deduction