Question:
I just graduated in December . I had all my student loans through the US Dept. of Education, Direct Student Loan Program. Part of my loans were unsubsidized, hence interest was being charged to me even though I was in school full-time. This interest amounted to several thousand dollars. I would regularly get quarterly interest statements, although no payments were technically due (until the loans went into repayment), I would occionally pay the interest.

During the year 1998, I paid $2000.00 total in interest. However, I did not get a 1098 tax statement from the lender. I called them and they said that they had made a policy decision not to recognize such interest payments while loans were in "in school or grace period status." In other words, unless the loans were in "repayment" any interest paid wasn't eligible for the tax deduction. I find this hard to believe, since the new student loan interest deduction seems to allow the deduction of any loan interest paid during this year. Since I did in fact pay interest, even though the lender refuses to provide me with a 1098 form, do I have any remedies--can I claim it anyway? Or am I just out of luck?

I know the money paid was credited towards interest accrued because I sent the check in response to a quarterly interest statement. The statement was akin to an optional bill, which says I could pay this interest or wait until the loan goes into repayment, in which case the interest will be capitalized into the principle. Also, the Dept. of Ed. rules state that all payments will be first applied to outstanding interest, then to principle. When the 60 month clock starts is irrelevant for me, since I am now in repayment as of Jan. If possible I would like to get the $1000 deduction for 1998, but I don't want the IRS to flag me for claiming this deduction, when the Dept. of Education hasn't reported any interest payments on a 1098 form. Anyone else have any advice?

Answer:
When you paid $ how did you know your payments were even credited to anything. What did they go to and how do we know it? Here is part of your problem: You don't fit the mold. The rules say once the loan is due and you make your first payment you then have 60 months in which an interest deduction is available. Once you start the clock, it doesn't shut off ( With some possibility of going into suspension if you become full time again etc) You are attempting to turn on the clock when the clock is not ready, that is loan payments are not yet due. And yes, I understand you don't want the loan interest to compound. First of all, only the first $1000 of interest paid counts. Me, since I paid it and the clock is starting anyway, I would claim it for 1998. Since you in fact paid it, I would claim it! You claim what you paid, up to $1000 of course. Wait until somebody asks if capitalized interest, no longer shown as interest is in fact deductible as interest when paid? There will be no end to confusion.