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? 


2 people found this helpful

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


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:

(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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suzanne , Licensed Tax Preparer
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