Student Loan Interest

[Earl]

Have client with student loan taken out before 2004. Loan has over $13,000 in capitalized
interest. After paying on the loan there is still over $10,000 in capitalized interest outstanding.

It is my understanding that all payments made during the year that are in excess of the interest applied to the loan for the year go first to pay the capitalized interest and only are applied to the principal after the capitalized interest is reduced to zero. Therefore, all payments during the year are deductible as student loan interest.

Now if the loan is consolidated and new loan taken what happens to the capitalized interest that is still shown on the old loan. Is it paid in full when the new loan is taken and limited to only $2,500 deduction for student loan interest or does it get carried over to the new loan to be recovered over several years until paid off.

[taxea]

you will have to check the regs but if you can do this on a home refi you should be able to do it on a student loan

[Earl]

Moving to top to see if can get more answers

[JG EA]

I only found:

"If you were deferring the interest on an unsubsidized Stafford Loan by capitalizing it, most lenders will add the capitalized interest to principal when you consolidate. (Lenders can capitalize interest at most quarterly, but most capitalize it once when the loans enter repayment or at other loan status changes.) "

http://www.finaid.org/loans/consolidation.phtml