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Why is my Sallie Mae student loan interest not deductible?

I took out a Smart Option student loan from Sallie Mae in 2011 to pay for graduate school. They paid my university directly and I graduated in 2012. I started making payments in January 2013 have paid over $5000 in interest in 2013.

When I log in to my Sallie Mae account to download my tax form, it says "Although you may have paid interest in 2013, it is ineligible for a tax deduction". When calling them they explain that it counts as a "private loan" and is not eligible for student loan interest tax deductions.

I don't get it. I took out the loan in my name, used it to pay for graduate school, Sallie Mae paid my university directly, and the name of the loan is 'smart option STUDENT LOAN'. Furthermore,  I am pretty sure the university I graduated from is accredited since it is an Ivy League. Am I missing something here? I read the IRS guidelines on what counts as an eligible student loan interest deduction and the payments I made to Sallie Mae qualify, so I do not understand.

Should I just claim that on my tax return and explain it if I get audited? 

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    I did some extra research and I think I have an answer to your question.

    All private student loans are school-certified.  That means that the lender contacts the school you need the loan for and asks them a set number of questions about you, like is the school a qualified institution, are you enrolled, what's the tuition costs, are you seeking a degree, credential or certification, and are you enrolled for less than a half-time load, etc. 

    Most private student loan programs require that the answers be aligned with what the IRS determines is a qualified loan for interest deduction purposes, but some private student loans (like the Sallie Mae Smart Option Student Loan, for one) will allow exceptions.  Some of the exceptions could be (and again, see the list below) that they can lend to you if your school isn't qualified, or you're carrying less than a half-load, or you need more money than the tuition and expenses in the current academic period because you need to pay for tuition from a previous period.

    The programs that allow exceptions are the ones that are probably causing the questions here.  Your circumstances with regard to the loan and how your school certified you for the loan could result in the lender letting you know your interest isn't tax deductible because of an exception in the loan program. 

    One of the issues that could be causing your loan to become disqualified is the requirement that non-federal student loans (and thus, private student loans) are required to be used to not only pay qualified expenses, but to pay those expenses in a reasonable amount of time.  The way I read it, for those private student loan programs that allow you to borrow more then the current academic year's expenses in order to pay previous period bills, then your whole loan doesn't qualify because of the timing rule.  So those of you who are confused because all your loan proceeds went to pay for school and your school was qualified, this might just be the thing that's disqualifying your loan.  THE PRIVATE STUDENT LOAN ALLOWED YOU TO BORROW MONEY TO PAY A PREVIOUS PERIOD OF SCHOOL EXPENSES, and that scenario doesn't qualify for tax deduction purposes if it's a private loan (i.e. Sallie Mae telling you the loan doesn't qualify because it's a private loan).

    Here's what the IRS says about what determines a student loan as qualified and a definition of "reasonable period of time":

    "Qualified Student Loan

    This is a loan you took out solely to pay qualified education expenses (defined later) that were:

    • For you, your spouse, or a person who was your dependent when you took out the loan,
    • Paid or incurred within a reasonable period of time before or after you took out the loan, and
    • For education provided during an academic period for an eligible student.

    Loans from the following sources are not qualified student loans.

    • A related person.
    • A qualified employer plan.

    "Reasonable period of time.   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

      Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.

    • The expenses relate to a specific academic period, and
    • The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period.

      If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances.

    Academic period.   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period."

    If you have reviewed the Student Loan Interest Deduction section in IRS publication 970

    http://www.irs.gov/publications/p970/ch04.html#en_US_2013_publink1000178246

    and believe your loan qualifies for the interest deduction in all the ways mentioned in the IRS publication, then you have the right to take the interest deduction.  But if your lender is telling you your interest isn't deductible, then document your circumstances and have evidence of how, when and for what the proceeds went to pay, get a statement from your school that they are qualified for student loan interest deduction purposes, show evidence that you were not less than a half-time student, and be able to show you were liable (with no co-signer) for the loan with loan docs.  And be aware that if the IRS does come a knocking to inquire, you will be charged a 20% penalty and have to pay back the money related to the deduction if the IRS doesn't believe you supported your case enough to qualify for the deduction.

    Also note, if your loan was repaid through a Student Loan Repayment Assistance Program, you can't take the interest deduction. 

    Ssome loans allow you to have the co-signer released once you're no longer a student and working so that you can take the deduction.  Check into that.


    Here's the list of private student loan programs that offer loans despite exceptions:

    http://www.finaid.org/loans/privatestudentloans.phtml
    (also cut and pasted below here)

    Special Uses

    Loans which can be used for study abroad include:

    • Sallie Mae Smart Option Student Loan

    Loans which do not require school certification include:

    • None

    Loans which can be used for previous school charges include:

    • Charter One TruFit Student Loan
    • Citizens Bank TruFit Student Loan
    • Connecticut Higher Education Supplemental Loan Authority (CHESLA)
    • PNC Solution Loan
    • Sallie Mae Smart Option Student Loan
    • Sallie Mae Career Training Smart Option Student Loan
    • Texas Extra Credit Education Loan
    • The Maine Loan and The Maine Medical Loan
    • Think Financial

    Most are available for up to six months after the end of the semester. Some are available for 60 days and some for up to a year.

    Loans which do not require the borrower to be enrolled in a degree-seeking program include:

    • Sallie Mae Career Training Smart Option Student Loan

    Interest rates and fees may be higher for borrowers who are not enrolled in a degree-seeking program.

    Loans which do not require the borrower to be enrolled at least half-time include:

    • Sallie Mae Smart Option Student Loan
    • Sallie Mae Career Training Smart Option Student Loan
    • Wells Fargo Collegiate Loan

    Some continuing education loans do not require at least half-time enrollment.

    Loans which are available to international students include:

    • Discover Student Loans (Social Security number and eligible US cosigner required)
    • iHELP Student Loan (Eligible US cosigner required)
    • Sallie Mae Smart Option Student Loan

    Typically international students are eligible only with a creditworthy cosigner (who must be a US citizen or permanent resident) and appropriate US Citizenship and Immigration Service documentation.

    Loans offering a fixed interest rate:

    • State Loan Programs
      • CHESLA Loan (Connecticut)
      • Dakota Education Alternative Loan (DEAL) (North Dakota, South Dakota, Minnesota, Montana, Wyoming or Wisconsin)
      • MEFA Loan for Undergraduate Education (Massachusetts)
      • The Maine Loan (Maine)
      • NYHELPs (New York)
      • Palmetto Assistance Loan (South Carolina)
      • Rhode Island Family Education Loan (RIFEL) (Rhode Island)
      • SELF Loan (Minnesota)
    • Private Student Loan Programs
      • Charter One TruFit Student Loan
      • Citizens Bank TruFit Student Loan
      • Discover Student Loans
      • PNC Education Lending
      • Sallie Mae Smart Option Student Loan
      • Social Finance, Inc.
      • SunTrust Custom Choice Loan
      • Wells Fargo Collegiate Loan

    Loans which are discharged upon the death or total and permanent disability of the primary borrower include:

    • Discover Student Loans
    • New York Higher Education Services Corporation's NYHELPs
    • Sallie Mae Smart Option Student Loan
    • Sallie Mae Career Training Smart Option Student Loan
    • Wells Fargo (all past and present private student loans)

    The TruFit loan from Charter One and Citizens Bank provides for cosigner release upon the death or total and permanent disability of the student borrower.






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      jek266-


      Hello -  I agree that this should be deductible as interest expense, just because it is a "private loan" does not exclude it.  

      The only interest that does not qualified on a  Qualified Loan is the interest form a loan from a related person. 

      Qualified Loans

      Qualified education loans are loans taken out solely to pay qualified education expenses, including tuition, fees, room and board, books, equipment and transportation for an eligible student to attend an eligible educational institution.

      for further info see IRS pub 970 - http://www.irs.gov/pub/irs-pdf/p970.pdf


      I am unsure while Sallie Mae gives this as an answer.  


      Hope this helps and thank you for using TurboTax!

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        The IRS says in their publications that your educational institution should be able to tell you if it is eligible educational institution for your tax purposes.

        The IRS defines an eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.               

        Certain educational institutions located outside the United States also 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 education, a hospital, or a health care facility that offers postgraduate 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 is not affected by the institution's subsequent loss of eligibility.

        Like TurboTaxRobertW mentioned, you don't have to have a 1098-E (interest) or 1098-T (tuition) statement to claim the student loan interest deduction or education credits.   

        You might want to also look into claiming the Life Time Learning credit for your tuition fees if you were in school in 2013 and paid tuition.  However, for the this credit, only tuition, fees and books actually purchased from the educational institution are allowed (no room/board or transportation).  Use Form 8863.         

                      

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          By any chance, was this for a graduate program at Brandeis University?  I'm having the same problem.

          • No this was for a graduate program for Cornell University. I contacted my school and they helped me straighten it out. Just received my 1098-E from Sallie Mae today.
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          I'm getting the same information for my Smart Option Loan. I used it to pay for tuition at an accredited art school. So it's not just the ivy's. Would love more information if people have it.

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            Hello,

            I received the same "Although you may have paid interest in 2013, it is ineligible for a tax deduction" message too when I logged into Sallie Mae.  It looks like there is some bug with the Sallie Mae site because I went and double checked my snail mail and long behold, I received a 1098-E from from them.  

            Check your mail or demand Sallie Mae to snail mail you one.  

            Good luck.

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              Don't trust Sallie Mae for tax advice. Get the form and ask a good accountant about the interest deduction. Mine qualified as a LIFETIME LEARNING credit.

              Sallie Mae can suck it. If they fired all their employees they could give the money to US students for free, and without interest. Greatest country on earth, huh? Then why do we insist on making our students pay on these loans for 20, 30 years? Sometimes for the rest of one's life. The US government and Sallie Mae are ruining higher education!

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                Is it possible that the on-line statement said "may be ineligible instead of is ineligible?"  The form you downloaded may have wanted to help tax payers understand that there are eligibility requirements for deductibility. 

                Some eligibility requirements are (1) that the loan proceeds be used only for higher education tuition, fees, room or board, books and transportation to/from school, (2) that the student carried at least half a full-time work load for his course of study, (3) that the loan proceeds were distributed within 90 days before to 90 days after the academic period.

                One issue could be that the loan was not your legal obligation, i.e. taken out by you.  It's not enough to be the one that pays the interest on the loan, you also have to be legally obligated to pay the loan.  So if your parents took out the loan and you're paying the loan back with your own money, talk to them about having them take the deduction on their own tax return and passing the savings on to you.  Only problem there is the deductibility of interest on student loans is limited to taxpayers with and AGI of $155,000 or less for married filing jointly and $75,000 for single, head of household, and widower (no deduction is allowed for married filing separate).

                • Thank you you for your answer. My loan was only used for tuition, room, and board and I was a full time graduate student. The loan was distributed 2 weeks before the academic period, and the loan was taken out by me and is being paid by me. Additionally, my income is within the range for single filing.

                  I contacted Sallie Mae and after "investigating the matter" they determined that I am ineligible for the deduction since my university is not qualified. They are trying to tell me that an ivy league university is not a qualified, accredited university. Lol

                  I don't understand why they are so reluctant to give me a 1098E... I contacted the IRS and even they agree my student loan interest is deductible. Also, I contacted the Department of Education and they confirm that indeed, my school is a qualified, accredited university. Am I missing something here?...
                • no you are not missing anything about it being not deductible.   They might not have to issue you a 1098-E for some reason ( have not investigated those rules)  but just because you do not get a 1098-E does not mean it is not deductible.
                • Thank you. SallieMae has told me, in writing, that they will not issue a 1098-E because my student loan is ineligible as they do not consider my university a "qualified" school of higher education.

                  If I go ahead and put the deduction on my tax return anyway, will that trigger an audit as there not be a 1098-E form to back up my claim? I have paid over $5000 in interest in 2013 (I know I can only deduct $2500)
                • It is not an automatic trigger for an Audit.  The IRS know that not all student interest is reported on a 1098-E, so matching of info will not always occur.   I will not deny that is is more likely you would be selected for confirmation of this deduction then if a 1098-e was issued.

                  You MAY get a letter asking about this deduction but why worry - you have the proof.  But a full blown audit, no.
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