Treasury and IRS Grant Relief In Student Loan Rules

The Treasury Department and the Internal Revenue Service today issued a notice relating to information reporting for the deduction of interest paid on qualified education loans.

"The notice issued today provides administrative relief to lenders and borrowers," said Acting Assistant Secretary for Tax Policy Greg Jenner. "Penalties will be waived for lenders who need additional time to update their reporting systems. Meanwhile, affected borrowers may use a reasonable method in computing deductible interest."

The student loan interest deduction was enacted in 1997, with a complementary reporting provision requiring lenders to report the amounts of interest that borrowers may be able to deduct. Under regulations published in May 2004, lenders are required to report amounts attributable to capitalized interest and loan origination fees as well as all other interest paid on qualified education loans made after September 1, 2004. The Treasury Department and IRS received comments that additional time would be required to update some lender reporting systems to report capitalized interest and loan origination fee amounts.

Accordingly, today's notice provides there will be no penalties on a lender that cannot report capitalized interest and loan origination fees received in 2004. This waiver of penalties will allow lenders to update their reporting systems to enable them to capture information on, and report payments of, capitalized interest and loan origination fees received in 2005 and future years for qualified education loans made after September 1, 2004. Borrowers may use any reasonable method to allocate loan origination fees over the term of the loan for purposes of computing deductible interest. Borrowers should consult IRS Publication 970, Tax Benefits for Education, for further information.

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