DL Insider
Reporting on the constantly changing world of student Direct Loans
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I created DLForms.info in response to the lack of information on the official Direct Loans website.
I have decided to also create this blog to raise awareness of the Direct Loans system transition, and keep people informed of upcoming changes.
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DL Insider 
I’ve been in contact with myedaccount.com for almost a month now regarding my online payments not posting. I’ve deleted and reentered my back account information 3 times now, had the numbers confirmed by the bank, and still the DL website has not debited my account. There is more than enough money in the accounts I’ve used to make the payments.
Each time I pay, the website will confirm I’ve made a payment and my balance will reset to $0 for the month, but my bank account is never debited the actual money. Then I get a phone call saying I owe almost $1000 in past due payments, so I’ve mailed them a check for that amount.
Has anyone else experience anything like this? It’s incredibly inconvenient and to be honest, a little scary. I feel like I’m submitting information to a fake website. Any insights?
Thank you,
Alex
Yes, people have had this problem. Certain banks won’t allow Direct Loans to debit for some reason. Like you mentioned it could also be a valid reason like a typo in your account number or wrong account type selected. I would recommend that you use an online bill payer service such as your banks online bill pay to make a payment in the meantime. Or mailing a check or money order the old fashioned way is an option. If your loan is in danger of going over 90 days past due, or already has, you should call Direct Loans immediately and request a forbearance. Also it helps to let them know a payment is on the way (they will stop calling). The Phone number is 1-800-848-0981 to speak directly to a loan counseling agent.
My wife and I encountered a problem with the 1098-e interest paid box as reported by Direct Loan Servicing, and I wish there was a way to get this information out there. She graduated in May 2011, and we made our first payment on 11/30/2011. In November, just before we made our first payment, several thousand dollars of interest was capitalized into the principal balance. The payment we made on 11/30 was less than the capitalized interest on Group A, to which the payment was allocated. So I was surprised to see $90.63 of interest on my wife’s 1098-e even though I thought we would be credited with an amount over $2,000. I did some research, and Direct Loan Servicing (as of 9/1/2004) is required to report student loan interest that includes capitalized interest. Unfortunately, they are improperly excluding capitalized interest that can be deducted as an above-the-line deduction on Form 1040. See the IRS letter on the subject here:
Click to access td9125.pdf
If I hadn’t caught the error, we would end up paying a few hundred dollars in taxes more than we should. And payments that should be applied to capitalized interest in 2012 will also be wrong on our 2012 form 1098-e.
All students should check their interest paid on their 1098-e to make sure it includes capitalized interest. Reporting a number on your 1040 that is different than the 1098-e might delay the processing of your tax return, but it is the correct way to do things and worth the hassle.
I called DLS to inform them of the issue, and they offered to send me a copy of their program policies. I asked for a supervisor and told them their policy on capitalized interest is wrong, but didn’t get anywhere.
If I knew who to call I would report them! They are causing students who don’t know enough about taxes to pay more than they should. It’s just deceptive and wrong.
If the interest caps, then its no longer interest, how would they calculate how much of the princpal used to be interest, and which portion is paid. I strongly advise against reporting an amount higher than reported by the lender; you risk being audited. If there is an error, it appers as a correction on the next years statement
To say that capitalized interest is no longer interest is not true–see page 4 of the treasury department letter on the IRS website below:
Click to access td9125.pdf
Also, see page 42 where it says the loan servicer is required to report interest capitalized as interest received by the lender. The servicer/lender capitalizes interest so that it compounds. They are not required to capitalize the interest to compound it, but it is easier to program their accounting systems this way.
The fact that Direct Loan Servicing is not reporting capitalized interest paid on the 1098-e is against IRS regulations. Starting with loans issued after 9/1/2004, they are required by the tax code to report capitalized interest paid on the 1098-e form issued to borrowers. It’s also lazy programming, bad policy, deceptive, and unfairly penalizes borrowers who don’t have the income to hire a tax professional.
I advise keeping the documentation to support the amount of capitalized interest you paid. If you claim more interest paid on your return than the 1098-e form, the IRS will likely delay processing of your return. And it is true that you do run the risk of being audited–however, if you haven’t done anything wrong, it is just a hassle, nothing more.
As a CPA, I suggest you figure out the correct amount, and report that amount. However, make sure you are doing it correctly because there are limits as to how much you can claim as a deduction, and there are income phase-outs. If you don’t know, find a tax accountant and ask.
Per the tax code section 1.6050S, payments are to be applied to interest and capitalized interest first. The “how would they know what to report” was the exact question the customer support people at Direct Loan Servicing brought up. The answer is “they would have to track it,” which they clearly are not doing.
Also this is from the Direct Loan Servicing website:
The information that you print serves as a copy of your IRS Form 1098-E, which we provide to you (via your billing statement, or a letter if you have paid your student loan in full) by the end of January 2012 and have also reported to the IRS. You can use this information when filing your federal taxes. You may be able to deduct the student loan interest you paid in 2011 on your federal tax return, but the amount shown is not necessarily the amount that is eligible for deduction. We recommend that you contact your tax advisor if you have questions, as our customer service associates are not trained to give tax advice.
I appreciate your insight and information, but I still advise against reporting the incorrect amount to the IRS. If you really feel Direct Loans is making a mistake. You or your spouse should write a letter to your congress representative or Arne Duncan, or Barack Obama. Direct Loans will have to respond in detail to congressional letters. It may be the only way to get an official response. Last years(2010) 1098e did have boxes for capped intetest and origination fees. If you do pursue it further, please follow up with a response here when you get the answer from them.
I drafted and sent a letter to Direct Loan Servicing detailing what they should be reporting, along with excerpts from the tax code and the treasury letter I referenced below. I also asked for a revised 1098-e.
Based on your reply, I will send the same letter to Arne Duncan at the Dept of Education, my congressman, and the white house. Coincidentally, I already submitted an email detailing the situation to both DLS and WhiteHouse.gov. No response yet. I would notify the IRS as well, but they have a vested interest not to change anything, and by the fact that I am a CPA, you can probably guess my opinion of the IRS.
To say that capitalized interest is no longer interest is not true–see page 4 of the treasury department letter on the IRS website below:
Click to access td9125.pdf
Also, see page 42 where it says the loan servicer is required to report interest capitalized as interest received by the lender. The servicer/lender capitalizes interest so that it compounds. They are not required to capitalize the interest to compound it, but it is easier to program their accounting systems this way.
The fact that Direct Loan Servicing is not reporting capitalized interest paid on the 1098-e is against IRS regulations. Starting with loans issued after 9/1/2004, they are required by the tax code to report capitalized interest paid on the 1098-e form issued to borrowers. It’s also lazy programming, bad policy, deceptive, and unfairly penalizes borrowers who don’t have the income to hire a tax professional.
I advise keeping the documentation to support the amount of capitalized interest you paid. If you claim more interest paid on your return than the 1098-e form, the IRS will likely delay processing of your return. And it is true that you do run the risk of being audited–however, if you haven’t done anything wrong, it is just a hassle, nothing more.
I remembered that I posted here last year about Direct Loan Servicing reporting incorrect amounts on the 1098-e form. I wanted to post a follow-up about the resolution of my situation. I wrote a letter to my Congresswoman, as well one at whitehouse.gov. It took 6 months, but I got a response letter in August from the Department of Education stating that I was correct, and I should deduct the full $2,500 in student loan (capitalized) interest on my tax return. There was no inquiry letter sent to me by the IRS, and my refund was not delayed.
I thought about this the other day when I received the 2012 form 1098-e, and noticed that it was again incorrect–however, this time the amount of interest+capitalized interest paid was overreported. It was still calculated wrong, and since I paid far more than $2,500 in 2012 anyway, there is no effect on my taxes. But again, I would encourage former students to track the amounts of interest+capitalized interest paid on their own.