How does student loan consolidation affect the federal student loan interest tax deduction?

how much student loan interest is deductible

Ok, some details: 1) I have a federal Stafford loan and several Wells Fargo loans which I'm looking to consolidate all into one Wells Fargo loan. 2) Before you begin, I couldn't care less about all these "benefits" that come with the federal loan. The only benefit I care about is the Federal. show more Ok, some details:

1) I have a federal Stafford loan and several Wells Fargo loans which I'm looking to consolidate all into one Wells Fargo loan.

2) Before you begin, I couldn't care less about all these "benefits" that come with the federal loan. The only benefit I care about is the Federal Student Loan Interest Deduction.

3) I know for a fact that all interest accrued (and paid) on the consolidated loan WILL BE deductible according to the FSLI deduction, AFTER consolidation takes place.

4) What I don't know, is this:

Currently, my unconsolidated student loans have accrued about $7000 of interest thus far. I know that if I don't consolidate, all of this $7000 will be tax-deductible when I pay it (up to $2500 a year). However, the big question in my mind is, will this $7000 STILL be tax-deductible AFTER I consolidate? Or, will only NEW interest acquired AFTER the point of consolidation be considered tax-deductible?

Chapter 4 of Form 970 doesn't have this example anywhere. I tried calling the IRS directly to get a straight answer on this. The representative I talked to didn't know and said they'd do some research and get back to me. After three weeks, an extremely formal gentleman from the IRS called me and gave me an extremely vague and confusing answer. He said that it all comes down to the verbiage of the specific consolidation contract. If the contract states that the consolidation "combines the original principle and the original interest", then, that $7000 will not be tax-deductible. If the contract states that it "keeps separate the original principle and the original interest", then, that $7000 all still

falls under the deduction.

Unfortunately, that answer doesn't seem to jive with common sense based on what form 970 says, nor did I think to ask the representative, "what if the contract doesn't specify either of the conditions you gave?" Does the categorization of the interest default to one condition or the other? I don't know. The IRS rep referenced U.S. Code 26 section 126 in response to how his answer was formed.

I looked through that code and despite the fact that it's written like trash I couldn't formulate any language which would stipulate that my $7000 would no longer be tax deductible after consolidation, but then again I'm not a lawyer.

What I'm looking for here is somebody with real-world experience with this, and KNOWS whether or not this interest is still tax-deductible after consolidation. You would think this would be a fairly common answer, but yet I cannot seem to find anyone who actually knows.

Update: EDIT: tro, your information is incorrect. If the consolidation is only for qualified student loans, what you are saying does not apply. This stuff is all in form 970. This is what my consolidation contract states: "By placing an X here and signing below, I am certifying to the Internal Revenue Service that all of. show more EDIT:

tro, your information is incorrect. If the consolidation is only for qualified student loans, what you are saying does not apply. This stuff is all in form 970. This is what my consolidation contract states:

"By placing an X here and signing below, I am certifying to the Internal Revenue Service that all of the proceeds of this Credit agreement will be used solely to pay off

prior debt incurred solely for the payment or refinancing of qualified higher education expenses"

Bobbie: I still WOULD be reciving form 1098-E from Wells Fargo after the consolidation. My questions do not surround this. My questions surround the $7000 of student loan interest that I've already accrued.

Source: answers.yahoo.com

Category: Credit

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