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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. 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 TIP 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. Example. In August 2021, you took out a $10,000 stu- dent loan to pay the tuition for your senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds you received. The interest (5% simple) on this loan accrued while you completed your senior year and for 6 months after graduating. 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 2021 through October 2022) 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 2022. You didn't receive a Form 1098-E for 2022 from the lender because the amount of interest you paid didn't re- quire the lender to issue an information return. However, you did receive an account statement from the lender that showed the following 2022 payments on your outstanding loan of $10,625 ($10,000 principal + $625 accrued but un- paid interest). CAUTION ! Chapter 4 Student Loan Interest Deduction Page 33