Hello,

My wife just finished law school, passed the bar, and is working for a firm. She has a combination of federal and private loans with unfavorable interest rates and we have been approved for a refinance at much better rate through a new lender.

My question: one of the two loans has been building up interest from when she first started school. I would like to ensure that we are able to deduct this interest from our taxes and am curious what the right approach is. If the refinance takes the full amount of what we owe, will the new loan roll that built up interest into the principal of the new loan and prevent us from being able to deduct it? The new lender claims that we will get a 1098 form from the first lender that shows we paid this interest. I am trying to independently verify this information and find out if we will be able to deduct this interest from our taxes even though it was paid off by a new loan and not directly from us.

Thanks for any info you can provide.

it depends, I gues;Refinancing generally means you'll have a higher tax bill than usual, because of your new low interest rate and smaller monthly payments. But that probably won't be the only difference.Depending on the type of refinancing plan you used, you may qualify for other deductions as well. Interest may be deductible for refinanced loans, including consolidated loans (loans that were taken out to refinance one or more student loans owed by the same borrower); and/or, collapsed loans (two or more loans that are administered as one loan by the lender or loan servicer).
If you refinance a "qualified student loan," then the new loan is also considered "qualified" only if it is used solely to pay "qualified education expenses." If you use any portion of the proceeds of a refinanced loan for another purpose (such as buying a car or making home improvements), then you cannot deduct any interest paid on the refinanced loan

Private student loans generally feature variable interest rates based on a borrower’s credit history. When borrowers first take out private student loans, many have a limited credit profile and are treated as higher credit risks by lenders. This means that, for many borrowers, private student loan interest rates can be quite high. Some borrowers who have graduated, obtained a job, and have excellent credit may be able to qualify to refinance their existing private student loans with a new private loan at a lower rate. Your new refinanced loan may not be considered a student loan for the purposes of the student loan interest tax deduction. If you regularly claim this deduction, be sure to consider whether the new loan will allow you to continue to do so.