When a student loan is paid off via consolidation, the interest on the previous loan is considered paid, and the lender sends out a 1098-E with the interest paid. I assume most people enter the 1098 into tax software (or hand it to a tax preparer) and claim this interest for a student loan deduction, assuming they are otherwise eligible (MAGI, etc).
But I'm looking for explicit confirmation that this is the right thing to do.
Publication 970 (https://www.irs.gov/pub/irs-pdf/p970.pdf) does not seem to specifically address this question. In the chapter on student loan interest starting on page 31, you'll find this definition:
With loan consolidation, one is effectively paying off the interest on the old loan, with a new load. The interest is "paid" via additional borrowing. So maybe there is no need to go further.Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
But then there is other information in the "Include as interest": section:
Now, loan capitalization and loan consolidation are not the same thing. But this comment about no deduction being allowed if no payments are being made makes me wonder if somehow a similar rule might apply upon consolidation. Because the interest is "paid" without any loan payment being made. It's a form of capitalization, in a way, in that the consolidation loan merges the previous principal and unpaid interest into a new principal loan. But it is NOT capitalization.Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.
There is a mention specifically of interest on consolidation loans being deductible:
But this refers to interest on the consolidation loan itself, and not interest paid WITH consolidation.Interest on refinanced and consolidated student loans. This includes interest on a loan used solely to refinance a qualified student loan of the same borrower. It also includes a single consolidation loan used solely to refinance two or more qualified student loans of the same borrower.
Every answer I can find online on blogs, CPA sites, turbotax, etc says that yes, if it's on the 1098-E it's deductible, and I suspect that is indeed the case. I assume that the quote from pub 970 "Student loan interest is interest you paid during the year on a qualified student loan" is enough. And that the source of the funds (consolidation loan or otherwise) is not relevant. But I'm preparing a reminder to first year medical students who are preparing taxes right now about this deduction, many of whom consolidated student loans upon graduation and are receiving 1098-Es with giant amounts of interest paid. I was hoping to include some direct, official reference on this issue to provide as a reference. Perhaps I'm just overthinking this.