@GatorCowboyLion wrote:The title says it all. I have a loan that had $4k capitalized. I know because I saw an old message in Fedloan Servicing that I previously ignored. Does the first 4k I pay on the principle of that loan count as interest for tax return purposes? 🤔
If you are making a principle payment, then it wouldn't be interest or tax deductible.
FedLoan (probably other servicer's too) provide a tax document every year showing how much you paid in interest. If sufficient enough was paid in the past that you didn't claim, you can file amended tax returns for those years to claim it.
By sufficient, I only mean that there is enough of a return for you to warrant the time and possible expense (using a tax professional) to claim the refund due.
^ yup, the institution should have sent you a document on the taxes you paid over the year. They're only required to do so if you paid at least $600, but I've had my servicer send me documents when it's less than that.
I have not paid on my student loans all year. When I do, I was hoping to count the interest against my taxable income. Can they deny me that opportunity by just switching the interest to principle by capitalizing it?
They can.
The only way to have avoided it was to actually pay the interest (capitalized interest, by definition becomes part of the principal, which is not tax deductible in most cases). It makes sense - they don't know that you will actually ever pay the principal, so why would they make that part tax-deductible?
Usually interest is capitalized during changes, though the lender can do it at other times.
There is more information here: https://studentaid.gov/understand-aid/types/loans/interest-rates
(edited because I time traveled, sorry)