! than your original loan and you use the additional

CAUTION 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 unpaid as of the date the payment is due, and fourth to the outstanding principal.

Example. In August 2024, you took out a $10,000 student 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 2024 through October 2025) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a payment of $200.51 due on the first of each month, beginning November 2025.

You didn’t receive a Form 1098-E for 2025 from the lender because the amount of interest you paid didn’t require the lender to issue an information return. However, you did receive an account statement from the lender that showed the following 2025 payments on your outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest).

Payment Date Payment Stated Interest Principal

November 2025 $200.51 $44.27 $156.24 December 2025 $200.51 $43.62 $156.89

Totals $401.02 $87.89 $313.13

To determine the amount of interest that could be deducted on the loan for 2025, you start with the total amount of stated interest you paid, $87.89. Next, allocate 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. You then apply the unpaid capitalized

32 Chapter 4 Student Loan Interest Deduction Publication 970 (2025)

interest ($625) to the two principal payments in the order in which they were made and determine that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that you qualify to claim the student loan interest deduction, you can deduct $401.02 ($87.89 + $10 + $303.13).

For 2026, you will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment you make and treat that amount as interest for tax purposes. You 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 interest 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 payments.

• 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 information, 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.