[Federal Register Volume 64, Number 13 (Thursday, January 21, 1999)]
[Proposed Rules]
[Pages 3257-3262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-986]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-116826-97]
RIN 1545-AW01
Deduction for Interest on Qualified Education Loans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and requests to videoconference
the public hearing.
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SUMMARY: This document contains proposed regulations relating to the
deduction for interest paid on qualified education loans. The proposed
regulations reflect changes to the law made by the Taxpayer Relief Act
of 1997, the Internal Revenue Service Restructuring and Reform Act of
1998, and the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999. The proposed regulations affect taxpayers who
pay interest on qualified education loans. This document also provides
notice that a public hearing will be held on the proposed regulations
and that persons outside the Washington, DC, area who wish to testify
at the hearing may request that the IRS videoconference the hearing to
their sites.
DATES: Written or electronically generated comments must be received by
April 21, 1999. Requests to videoconference the hearing to other sites
must be received by March 22, 1999.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-116826-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
116826-97), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments. html. The IRS will publish the time and date of the public
hearing and the locations of any videoconferencing sites in an
announcement in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, contact
John P. Moriarty, (202) 622-4950 (not a toll-free number); concerning
submissions of comments, the hearing, and/or to be placed on the
building access list to attend the hearing, contact Michael L.
Slaughter (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1). Section 202 of the Taxpayer Relief Act of
1997 (Pub. L. 105-34 (111 Stat. 778) (TRA 97)) added section 221 of the
Internal Revenue Code to allow a deduction from gross income for
certain interest paid on qualified education loans. On November 17,
1997, the IRS published Notice 97-60 (1997-46 I.R.B. 8) to provide
guidance on the higher education tax incentives enacted by TRA 97,
including the deduction for interest paid on qualified education loans.
Section 6004(b) of the Internal Revenue Service Restructuring and
Reform Act of 1998 (Pub. L. 105-206 (112 Stat. 685)) (RRA 98) and
section 4003(a) of the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999 (Pub. L. 105-277 (112 Stat. 2681)) (Omnibus
Act 99) made technical amendments to section 221. TRA 97 also added
section 6050S to the Internal Revenue Code, which requires the filing
of information returns by certain persons who receive payments of
interest that may be deductible as interest on a qualified education
loan. In 1998, the IRS published two notices describing the information
returns that are required under section 6050S for 1998 and 1999. On
January 20, 1998, the IRS published Notice 98-7 (1998-3 I.R.B. 54),
which describes the information reporting required under section 6050S
for 1998. On November 16, 1998, the IRS published Notice 98-54 (1998-46
I.R.B. 25), which modified Notice 98-7 to reflect a technical amendment
made by RRA 98 and extended the application of Notice 98-7, as so
modified, to information reporting required under section 6050S for
1999.
Explanation of Provisions
Section 221 allows taxpayers who are legally obligated to pay
interest on qualified education loans a federal income tax deduction
for their interest payments. The deduction is an adjustment to gross
income and, therefore, is available to eligible taxpayers regardless of
whether they itemize deductions.
The deduction is limited to $2,500 for taxable years beginning
after 2000. For taxable years 1998, 1999 and 2000, the limits are
$1,000, $1,500 and $2,000, respectively. Consistent with the income
limitations in section 221(b)(2), the proposed regulations provide that
the deduction is phased-out for taxpayers with modified adjusted gross
income between $40,000 and $55,000 ($60,000 and $75,000 for taxpayers
filing a joint return) for the taxable year. For taxable years
beginning after 2002, these amounts will be adjusted for inflation.
No deduction under section 221 is allowed in a taxable year to an
individual who is properly claimed as a dependent on another taxpayer's
federal income tax return for the taxable year. In addition, a taxpayer
who is married as of the end of a taxable year is allowed a deduction
under section 221 only if the taxpayer and the taxpayer's spouse file a
joint return for the taxable year.
Consistent with section 221(e)(1), the proposed regulations define
a qualified
[[Page 3258]]
education loan to mean any indebtedness incurred by the taxpayer solely
to pay qualified higher education expenses on behalf of a student
enrolled at least half-time in a program leading to a degree,
certificate, or other recognized educational credential. The student
must be the taxpayer, the taxpayer's spouse, or the taxpayer's
dependent at the time the indebtedness is incurred. In addition, the
qualified higher education expenses must be incurred within a
reasonable period of time before or after the indebtedness is incurred.
The requirement that the indebtedness be incurred solely to pay
qualified higher education expenses was added by RRA '98. Accordingly,
mixed use loans are not qualified education loans. Similarly, revolving
lines of credit (e.g., credit card debt) generally are not qualified
education loans, unless the borrower uses the line of credit solely to
pay qualified higher education expenses.
Consistent with section 221(e)(1), the proposed regulations provide
that a loan made by an individual who is related to the borrower,
within the meaning of section 267(b) or 707(b)(1), is not a qualified
education loan. For example, a loan from a parent or grandparent of the
borrower is not a qualified education loan. In addition, consistent
with a technical amendment to section 221(e) contained in the Omnibus
Act '99, the proposed regulations provide that loans made under any
qualified employer plan (within the meaning of section 72(p)(4)) or
made pursuant to any contract referred to in section 72(p)(5) are not
qualified education loans. The proposed regulations also provide that
loans that are not issued or guaranteed as part of a federal
postsecondary education loan program nonetheless may be qualified
education loans.
The proposed regulations provide that whether or not qualified
higher education expenses are paid within a reasonable period of time
before or after the indebtedness is incurred depends on all the facts
and circumstances. However, the proposed regulations provide two safe
harbors. The first safe harbor treats any education loan that is issued
as part of a federal postsecondary education loan program as meeting
the reasonable period requirement. The second safe harbor treats
qualified higher education expenses as paid or incurred within a
reasonable period of time before or after the indebtedness is incurred
if the expenses relate to a particular academic period and the proceeds
of the loan are disbursed within a period that begins 60 days prior to
the start of that academic period and ends 60 days after the end of
that academic period. The proposed regulations do not require actual
tracing of loan proceeds to the payment of qualified higher education
expenses.
The proposed regulations define an eligible educational institution
by reference to section 25A to mean any college, university, vocational
school, or other postsecondary educational institution that is
described in section 481 of the Higher Education Act of 1965 (20 U.S.C.
1088) as in effect on August 5, 1997, and certified by the U.S.
Department of Education to be eligible to participate in a student aid
program administered by that department. This category includes
generally all accredited public, nonprofit, and proprietary
postsecondary institutions. Consistent with section 221(e)(2), the
proposed regulations provide that, for purposes of the qualified
education loan interest deduction, eligible educational institutions
also include institutions that conduct an internship or residency
program leading to a degree or certificate awarded by an institution of
higher education, a hospital, or a health care facility that offers
postgraduate training.
Qualified higher education expenses are generally the same as the
cost of attendance as determined by the eligible educational
institution for purposes of calculating a student's financial need, in
accordance with section 472 of the Higher Education Act of 1965, 20
U.S.C. 1087ll, as in effect on August 4, 1997. Such expenses generally
include tuition, fees, room, board, books, equipment, and other
necessary expenses, such as transportation. However, for purposes of
calculating qualified higher education expenses, the amount of such
expenses must be reduced by educational assistance that the student
receives and excludes from gross income under section 117 (qualified
scholarships), section 127 (employer-provided educational assistance),
section 135 (redemption of U.S. savings bonds), and section 530
(distributions from education IRAs). In addition, such expenses must be
reduced by a veterans' or member of the armed forces' educational
assistance allowance under chapter 30, 31, 32, 34 or 35 of title 38
United States Code, or under chapter 1606 of title 10, United States
Code, and any other educational assistance that is excludable from the
student's gross income (other than as a gift, bequest, devise or
inheritance within the meaning of section 102(a)).
The qualified education loan interest deduction generally is
available only for interest payments made during the first 60 months in
which interest payments are required on the qualified education loan.
The proposed regulations provide that the 60-month period commences
with the month in which a loan first enters mandatory repayment status
and continues to elapse regardless of whether payments are actually
made, unless the repayment period is suspended for a period of
deferment or forbearance. The 60-month period may expire at different
times for different loans of the same borrower.
The date on which a qualified education loan enters repayment
status is determined by reference to the loan agreement or the federal
regulations governing the applicable federal postsecondary education
loan program.
The proposed regulations provide that a deduction is allowed for a
payment of interest that was required to be made in one month but that
actually is made in a subsequent month prior to the expiration of the
60-month period. A deduction is not allowed for a payment of interest
that was required to be made in one month but that actually is made in
a subsequent month after the expiration of the 60-month period.
The proposed regulations provide that a qualified education loan
and all refinancings of that loan are treated as a single loan for
purposes of calculating the 60-month period.
Consistent with section 221(d), as amended by RRA '98, the proposed
regulations provide special rules for calculating the 60-month period
for consolidated loans or collapsed loans. These rules generally mirror
the guidance contained in Notice 98-7 and provide that the 60-month
period begins on the most recent date on which any of the underlying
loans entered repayment status. See Conf. Rep. No. 599, 105th Cong., 2d
Sess., at 339 (1998).
If a qualified education loan entered repayment status prior to
January 1, 1998 (the effective date of section 221), the taxpayer is
not entitled to deduct any interest paid during that portion of the 60-
month period occurring prior to January 1, 1998. A deduction is allowed
only for interest due and paid during that portion, if any, of the 60-
month period remaining after December 31, 1997.
General tax principles apply in determining what is deductible
interest for purposes of section 221. However, to assist taxpayers, the
proposed regulations specifically provide that loan origination fees
and capitalized interest are interest and are deductible under section
221 as the stated principal amount of the qualified education loan is
repaid.
[[Page 3259]]
Proposed Effective Date
These regulations are proposed to be effective for interest paid
after the date they are published in the Federal Register as final
regulations. Taxpayers may rely on these proposed regulations for
guidance pending the issuance of final regulations. If, and to the
extent, future guidance is more restrictive than the guidance in these
proposed regulations, the future guidance will be applied without
retroactive effect.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and, because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS. The IRS and Treasury Department request comments on the
clarity of the proposed rules and on how they can be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing will be scheduled in the Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. The IRS
recognizes that persons outside the Washington, DC, area may also wish
to testify at the public hearing through videoconferencing. Requests to
include videoconferencing sites must be received by March 22, 1999. If
the IRS receives sufficient indications of interest to warrant
videoconferencing to a particular city, and if the IRS has
videoconferencing facilities available in that city on the date the
public hearing is to be scheduled, the IRS will try to accommodate the
requests.
The IRS will publish the time and date of the public hearing and
the locations of any videoconferencing sites in an announcement in the
Federal Register.
Drafting Information.
The principal author of these regulations is John P. Moriarty of
the Office of the Assistant Chief Counsel (Income Tax and Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.221-1 also issued under 26 U.S.C. 221(d). * * *
Par. 2. Section 1.221-1 is added under the undesignated
centerheading ``Additional Itemized Deductions For Individuals'' to
read as follows:
Sec. 1.221-1 Deduction for interest on qualified education loans.
(a) In general. An individual taxpayer is allowed a deduction under
section 221 from gross income for certain interest paid during the
taxable year on a qualified education loan. The deduction is allowed
only with respect to interest paid on a qualified education loan during
the first 60 months that interest payments are required under the terms
of the loan. See paragraph (e) of this section for rules relating to
the 60-month rule.
(b) Eligibility--(1) Taxpayer must be legally obligated to make
interest payments. A taxpayer is allowed a deduction under section 221
only if the taxpayer is legally obligated to make interest payments
under the terms of the qualified education loan.
(2) Claimed dependents not eligible--(i) In general. An individual
is not allowed a deduction under section 221 for a taxable year if the
individual is a dependent (as defined in section 152) for whom a
deduction under section 151 is claimed on another taxpayer's federal
income tax return for the same taxable year (or, in the case of a
fiscal year taxpayer, the taxable year beginning in the same calendar
year as the individual's taxable year).
(ii) Examples. The following examples illustrate the rules of this
paragraph (b):
Example 1. Student not claimed as dependent. Student A pays $750
of interest on qualified education loans during 1998. Student A's
parents do not claim her as a dependent for 1998. Assuming all other
relevant requirements are met, Student A may deduct the $750 of
interest paid in 1998 under section 221.
Example 2. Student claimed as dependent. Student B pays $750 of
interest on qualified education loans during 1998. Only Student B is
legally obligated to make the payments. Student B's parent claims
him as a dependent and a deduction under section 151 is allowed with
respect to Student B in computing the parent's 1998 federal income
tax. Neither Student B nor Student B's parent may deduct the $750 of
interest paid in 1998 under section 221.
(3) Married taxpayers. If a taxpayer is married as of the close of
the taxable year, a deduction under this section is allowed only if the
taxpayer and the taxpayer's spouse file a joint return for that taxable
year.
(c) Maximum deduction. In any taxable year, the amount allowed as a
deduction under section 221 may not exceed the amount determined in
accordance with the following table:
------------------------------------------------------------------------
Maximum
Taxable year beginning in: deduction
------------------------------------------------------------------------
1998....................................................... $1,000
1999....................................................... 1,500
2000....................................................... 2,000
2001 and thereafter........................................ 2,500
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(d) Limitation based on modified adjusted gross income--(1) In
general. The deduction allowed under section 221 is phased out ratably
for taxpayers with modified adjusted gross income between $40,000 and
$55,000 ($60,000 and $75,000 for married individuals who file a joint
return). Taxpayers with modified adjusted gross income of $55,000 or
above (or $75,000 or above for joint filers) are not allowed a
deduction under section 221.
(2) Modified adjusted gross income defined. The term modified
adjusted gross income means the adjusted gross income (as defined in
section 62) of the taxpayer for the taxable year increased by any
amount excluded from gross income under section 911, 931, or 933
(relating to income earned abroad or from certain U.S. possessions or
Puerto Rico). Adjusted gross income must be determined under this
section after taking into account the exclusions, deductions and
limitations provided for by sections 86 (social security and tier 1
railroad retirement benefits), 135 (redemption of qualified U.S.
savings bonds), 137 (adoption assistance programs), 219 (deductible IRA
contributions) and 469 (limitation on passive activity losses and
credits).
(3) Inflation adjustment. For taxable years beginning after 2002,
the amounts in paragraph (d)(1) of this section will
[[Page 3260]]
be increased for inflation occurring after 2001 in accordance with
section 1(f)(3). If any amount adjusted under this paragraph (d)(3) is
not a multiple of $5,000, the amount will be rounded to the next lowest
multiple of $5,000.
(e) 60-month rule--(1) General rule. A deduction for interest paid
on a qualified education loan is allowed only for payments made during
the first 60 months that interest payments are required on the loan.
The 60-month period begins on the date the qualified education loan
first enters repayment status and ends 60 months later, unless the
period is suspended for periods of deferment or forbearance within the
meaning of paragraph (e)(3) of this section. The 60-month period
continues to elapse regardless of whether the required interest
payments are actually made. The date on which the qualified education
loan first enters repayment status is determined under the terms of the
loan agreement or, in the case of a loan issued or guaranteed under a
federal postsecondary education loan program, under applicable federal
regulations. For special rules relating to loan refinancings,
consolidated loans, and collapsed loans, see paragraph (h)(1) of this
section.
(2) Loans that entered repayment status prior to January 1, 1998.
In the case of any qualified education loan that entered repayment
status prior to January 1, 1998, no deduction is allowed under section
221 for interest paid during the portion of the 60-month period
described in paragraph (e)(1) of this section that occurred prior to
January 1, 1998. A deduction is allowed only for interest due and paid
during that portion, if any, of the 60-month period remaining after
December 31, 1997.
(3) Periods of deferment or forbearance. The 60-month period
described in paragraph (e)(1) of this section is suspended for any
period when interest payments are not required on a qualified education
loan because the borrower has been granted deferment or forbearance
(including postponement in anticipation of cancellation). However, in
the case of a qualified education loan that is not issued or guaranteed
under a federal postsecondary education loan program, the 60-month
period will be suspended under this paragraph (e)(3) only if the
borrower satisfies one of the conditions for deferment or forbearance
established by the U.S. Department of Education for federal student
loan programs under Title IV of the Higher Education Act of 1965, such
as half-time study at a postsecondary educational institution, study in
an approved graduate fellowship program or in an approved
rehabilitation program for the disabled, inability to find full-time
employment, economic hardship, or the performance of services in
certain occupations or federal programs. The 60-month period is not
suspended if, under the terms of the loan--
(i) Interest continues to accrue while the loan is in deferment or
forbearance; and
(ii) The taxpayer has the option of paying the interest currently
or requesting that the interest be capitalized, and the taxpayer elects
to make current interest payments.
(4) Late payments. A deduction is allowed for a payment of interest
that was required to be made in one month but that actually is made in
a subsequent month prior to the expiration of the 60-month period. A
deduction is not allowed for a payment of interest that was required to
be made in one month but that actually is made in a subsequent month
after the expiration of the 60-month period.
(5) Examples. The following examples illustrate the rules of this
paragraph (e). In the examples, assume that the institution is an
eligible educational institution, the loan is a qualified education
loan, and the student is legally obligated to make interest payments
under the terms of the loan:
Example 1. Payment prior to 60-month period. Student C obtains a
loan to attend College V. The terms of the loan provide that
interest accrues on the loan while C earns his undergraduate degree
but that C is not required to begin making payments of interest
until six full calendar months after he graduates. Nevertheless, C
voluntarily pays interest on the loan while attending College V. C
is not allowed a deduction for interest paid while attending College
V because the payments were made during a month prior to the start
of the 60-month period.
Example 2. Deferment option not exercised. The facts are the
same as Example 1, except that Student C makes no payments on the
loan while C is enrolled at College V. C graduates in June, 1999 and
is required to begin making monthly payments of principal and
interest on the loan in January, 2000. The 60-month period described
in paragraph (e)(1) of this section begins in January, 2000. In
August, 2000, C enrolls in graduate school on a full-time basis.
Under the terms of the loan, C may apply for deferment of the loan
payments while C is enrolled in graduate school. However, C elects
not to apply for deferment and continues to make monthly payments on
the loan during graduate school. Assuming all other relevant
requirements are met, C may deduct interest paid on the loan during
the 60-month period beginning in January, 2000, including interest
paid while C was enrolled in graduate school, but elected not to
defer payment.
Example 3. Late payment, within 60-month period. The facts are
the same as Example 2, except that, after the loan enters repayment
status in January, 2000, Student C makes no interest payments until
March, 2000. In March, 2000, C pays interest required to be paid for
the months of January, February, and March, 2000. Assuming all other
relevant requirements are met, C is allowed a deduction for the
interest paid in March for the months of January, February, and
March because the interest payments were required under the terms of
the loan and were paid within the 60-month period, even though the
January and February interest payments may be late.
Example 4. Late payment during deferment but within 60-month
period. The terms of Student D's qualified education loan require
her to begin making monthly payments of interest on the loan in
January, 2000. The 60-month period described in paragraph (e)(1) of
this section begins in January, 2000. D fails to make the required
interest payments for the months of November and December, 2000. In
January, 2001, D enrolls in graduate school on a half-time basis.
Under the terms of the loan, D is eligible for deferment of the loan
payments due while D is enrolled in graduate school. The deferment
is granted effective January 1, 2001. In March, 2001, while the loan
is in deferment, D pays the interest due for the months of November
and December, 2000. Assuming all other relevant requirements are
met, D is allowed a deduction for interest paid in March, 2001 for
the months of November and December, 2000 because the interest
payments were made paid prior to the expiration of the 60-month
period, even though the November and December interest payments were
late and were made while the loan was in deferment.
Example 5. 60-month period. The facts are the same as Example 4
except that Student D graduates from graduate school in December,
2004 and is required to begin making monthly payments of interest on
the loan in June, 2005. As of January, 2001, when the loan entered
deferment status, 12 months of the 60-month period had elapsed
(January-December, 2000). As of June, 2005, when the loan re-enters
repayment status, there are 48 months remaining in the 60-month
period for that loan.
Example 6. 60-month period. The terms of Student E's qualified
education loan require him to begin making monthly payments of
interest on the loan in November, 1999. The 60-month period
described in paragraph (e)(1) of this section begins in November,
1999. In January, 2000, E enrolls in graduate school on a half-time
basis. As permitted under the terms of the loan, E applies for
deferment of the loan payments due while E is enrolled in graduate
school. While awaiting formal notification from the lender that his
request for deferment has been granted, E pays interest due for the
month of January, 2000. In February, 2000, E receives notification
from the lender that deferment has been granted, effective as of
January 1, 2000. Assuming all other requirements are met, E is
allowed a deduction for interest paid in January, 2000, prior to his
receipt of the notification, even though the deferment
[[Page 3261]]
was granted retroactive to January 1, 2000. As of February, 2000,
there are 57 months remaining in the 60-month period for that loan.
Example 7. Reduction of 60-month period for months prior to
January 1, 1998. The first payment on a qualified education loan is
due on January 1, 1997. Thereafter, interest is required to be paid
on a monthly basis. The 60-month period for this loan begins on
January 1, 1997. However, no deduction is allowed for interest paid
by the borrower prior to January 1, 1998, the effective date of
section 221. Assuming all other relevant requirements are met, the
borrower may deduct interest due and paid on the loan during the 48
months beginning on January 1, 1998 (unless such period is extended
for periods of deferment or forbearance under paragraph (e)(3) of
this section).
(f) Definitions--(1) Eligible educational institution. In general,
an eligible educational institution means any college, university,
vocational school or other post-secondary educational institution that
is described in section 481 of the Higher Education Act of 1965 (20
U.S.C. 1088), as in effect on August 5, 1997, and is certified by the
U.S. Department of Education to be eligible to participate in student
aid programs administered by the Department, as described in section
25A(f)(2). In addition, for purposes of this section, an eligible
educational institution also includes an institution that conducts an
internship or residency program leading to a degree or certificate
awarded by an institution, a hospital, or a health care facility that
offers postgraduate training.
(2) Qualified higher education expenses--(i) In general. Qualified
higher education expenses means the cost of attendance (as defined in
section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as
in effect on August 4, 1997), at an eligible educational institution,
reduced by the amounts described in paragraph (f)(2)(ii) of this
section. Consistent with section 472 of the Higher Education Act of
1965, 20 U.S.C. 1087ll, the cost of attendance is determined by the
eligible educational institution and includes tuition and fees normally
assessed a student carrying the same academic workload, an allowance
for room and board, and an allowance for books, supplies,
transportation and miscellaneous expenses of the student.
(ii) Reductions. Qualified higher education expenses must be
reduced by any amount paid to or on behalf of a student with respect to
such expenses that is--
(A) A qualified scholarship that is excludable from income under
section 117;
(B) A veterans' or member of the armed forces' educational
assistance allowance under chapter 30, 31, 32, 34 or 35 of title 38,
United States Code, or under chapter 1606 of title 10, United States
Code;
(C) Employer-provided educational assistance that is excludable
from income under section 127;
(D) Any other educational assistance that is excludable from gross
income (other than as a gift, bequest, devise, or inheritance within
the meaning of section 102(a));
(E) Any amount excluded from gross income under section 135
(relating to the redemption of United States savings bonds); or
(F) Any amount distributed from an education individual retirement
account described in section 530 and excluded from gross income.
(3) Qualified education loan--(i) In general. Qualified education
loan means indebtedness incurred by a taxpayer solely to pay qualified
higher education expenses that are--
(A) Incurred on behalf of a student who is the taxpayer, the
taxpayer's spouse, or a dependent (as defined in section 151) of the
taxpayer at the time the indebtedness is incurred;
(B) Paid or incurred within a reasonable period of time before or
after the indebtedness is incurred. Qualified higher education expenses
that are paid with the proceeds of education loans that are part of a
federal postsecondary education loan program are deemed to meet this
requirement. For other loans, except as provided in paragraph
(f)(3)(ii) of this section, what constitutes a reasonable period of
time is determined based on all the relevant facts and circumstances;
and
(C) Attributable to education provided during an academic period,
as described in section 25A and the regulations thereunder, when the
student is an eligible student as defined in section 25A(b)(3)
(requiring that the student be a degree candidate carrying at least
one-half the normal full-time workload).
(ii) Reasonable period safe harbor. For purposes of paragraph
(f)(3)(i)(B) of this section, qualified higher education expenses are
treated as paid or incurred within a reasonable period of time before
or after the indebtedness is incurred if the expenses relate to a
particular academic period and the loan proceeds are disbursed within a
period that begins 60 days prior to the start of that academic period
and ends 60 days after the end of that academic period.
(iii) Related party. A loan made by a person who is related to the
borrower, within the meaning of section 267(b) or 707(b)(1), is not a
qualified education loan. For example, a parent or grandparent of the
borrower is a related person. In addition, a loan made under any
qualified employer plan as defined in section 72(p)(4) or under any
contract referred to in section 72(p)(5) is not a qualified education
loan.
(iv) Not federally issued or guaranteed. A loan does not have to be
issued or guaranteed under a federal postsecondary education loan
program to be a qualified education loan.
(4) Examples. The following examples illustrate the rules in this
paragraph (f):
Example 1. Eligible educational institution. University Z is a
postsecondary educational institution described in section 481 of
the Higher Education Act of 1965. University Z has completed the
necessary paperwork and has been certified by the U.S. Department of
Education as eligible to participate in federal financial aid
programs administered by the Department, although University Z
chooses not to participate. University Z is an eligible educational
institution.
Example 2. Qualified education loan. Student F borrows money
from a commercial bank to pay qualified higher education expenses
related to his enrollment on a half-time basis in a graduate program
at an eligible educational institution. All the loan proceeds are
used to pay qualified higher education expenses incurred within a
reasonable period of time after the indebtedness is incurred. The
loan is not federally guaranteed. The commercial bank is not related
to Student F within the meaning of section 267(b) or 707(b)(1). The
fact that Student F's loan is not federally issued or guaranteed
does not prevent the loan from being a qualified education loan
within the meaning of section 221.
Example 3. Qualified higher education expenses. Student G
receives a $3,000 qualified scholarship for the 1999 Fall semester,
that is excludable from F's gross income under section 117. Student
G receives no other forms of financial assistance with respect to
the 1999 Fall semester. Student G's cost of attendance for the Fall
semester, as determined by Student G's eligible educational
institution for purposes of calculating a student's financial need
in accordance with section 472 of the Higher Education Act, is
$16,000. For the 1999 Fall semester, Student G has qualified higher
education expenses of $13,000 (the cost of attendance as determined
by the institution ($16,000) reduced by the qualified scholarship
proceeds excludable from gross income ($3,000)).
Example 4. Qualified education loan. Student H signs a
promissory note for a loan on August 15, 1999, to pay for qualified
higher education expenses for the 1999 Fall and 2000 Spring
semesters. On August 20, 1999, loan proceeds are disbursed by the
lender to Student H's college and credited to H's account to pay
qualified higher education expenses for the 1999 Fall semester, that
begins on August 23, 1999. On January 25, 2000, additional loan
proceeds are disbursed by the lender to Student H's college and
credited to H's account to pay qualified higher education expenses
for the 2000 Spring semester, that began on January 10,
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2000. Student H's qualified higher education expenses for the two
semesters are paid within a reasonable period of time, as the first
loan disbursement was made within 60 days prior to the start of the
Fall 1999 semester and the second loan disbursement was made during
the Spring 2000 semester.
Example 5. Mixed-use loans. Student I signs a promissory note
for a loan which is secured by I's personal residence. Part of the
loan proceeds will be used to pay for certain improvements to I's
residence and part of the loan proceeds will be used to pay
qualified higher education expenses of I's spouse. Because the loan
is not incurred by I solely to pay qualified higher education
expenses, the loan is not a qualified education loan.
(g) Denial of double benefit. No deduction is allowed under this
section for any amount for which a deduction is allowed under another
provision of Chapter 1 of the Internal Revenue Code.
(h) Special rules--(1) 60-month limitation--(i) Refinancing. A
qualified education loan and all refinancings of that loan are treated
as a single loan for purposes of calculating the 60-month period
described in paragraph (e)(1) of this section.
(ii) Consolidated loans. A consolidated loan is a single loan that
refinances more than one qualified education loan of a borrower. For
consolidated loans, the 60-month period described in paragraph (e)(1)
of this section begins on the most recent date on which any of the
underlying loans entered repayment status and includes any subsequent
month in which the consolidated loan is in repayment status.
(iii) Collapsed loans. A collapsed loan is two or more qualified
education loans of a single borrower that are treated as a single
qualified education loan for loan servicing purposes and are not
separately accounted for by the lender or servicer. For a collapsed
loan, the 60-month period described in paragraph (e)(1) of this section
begins on the most recent date on which any of the underlying loans
entered repayment status and includes any subsequent month in which any
of the underlying loans is in repayment status.
(2) Loan origination fees and capitalized interest--(i) In general.
Loan origination fees (other than any fees for services) and
capitalized interest are interest and are deductible under this
section.
(ii) Capitalized interest defined. Capitalized interest means any
accrued and unpaid interest on a qualified education loan that is
capitalized by the lender (in accordance with the terms of the loan)
and added to the outstanding principal balance of the qualified
education loan.
(iii) Allocation of payments. Loan origination fees and capitalized
interest are deemed to be paid by the taxpayer when principal is repaid
on the qualified education loan. Accordingly, the taxpayer may deduct
the portion of a stated principal payment that is treated as the
payment of any loan origination fees or capitalized interest on the
loan. See Secs. 1.446-2(e) and 1.1275-2(a) for rules on how to allocate
payments between interest and principal. In general, under these rules,
a payment (regardless of its label) is treated first as a payment of
interest to the extent of the interest that has accrued and remains
unpaid as of the date the payment is due, second as a payment of any
loan origination fees or capitalized interest, until such amounts have
been reduced to zero, and third as a payment of principal.
(3) Examples. The following examples illustrate the rules of this
paragraph (h):
Example 1. Refinancing. Student J obtains a qualified education
loan to pay for an undergraduate degree at an eligible educational
institution. After graduation, Student J is required to make monthly
interest payments on the loan beginning in January 2000. Student J
makes the required interest payments for 15 months. In April 2001,
Student J borrows money from another lender to be used exclusively
to repay the first qualified education loan. The new loan requires
interest payments to start immediately. At the time Student J is
required to make interest payments on the new loan there are forty
five months remaining of the original 60-month period referred to in
paragraph (e)(1) of this section.
Example 2. Collapsed loans. To finance his education, Student K
obtains four separate qualified education loans from Lender B. The
loans enter repayment status on different dates. After all of
Student K's loans have entered repayment status, Lender B informs
Student K that all four loans will be transferred to Lender C.
Following the transfer, Lender C treats the loans as a single loan
for loan servicing purposes; Lender C sends Student K a single
statement that shows the total principal and interest, and does not
keep separate records with respect to each loan. The 60-month period
described in paragraph (e)(1) of this section begins on the most
recent date on which any of Student K's four loans entered repayment
status.
Example 3. Capitalized interest. Interest on Student L's
qualified education loan accrues while Student L is in school, but
Student L is not required to make any payments on the loan until six
months after he graduates. At that time, all accrued but unpaid
interest is capitalized by the lender and is added to the
outstanding principal amount of the loan. Thereafter, Student L is
required to make monthly payments of interest and principal on the
loan. For purposes of section 221, interest includes both stated
interest and capitalized interest. Therefore, in determining the
total amount of interest paid on the qualified education loan during
the 60-month period described in paragraph (e)(1) of this section,
Student L may deduct any principal payments that are treated as
payments of capitalized interest under paragraph (h)(4) of this
section.
(i) Effective date. This section applies to interest due and paid
after December 31, 1997, on a qualified education loan.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-986 Filed 1-20-99; 8:45 am]
BILLING CODE 4830-01-P