On March 20, 2020 the U.S. Department of Education directed the office of Federal Student Aid to suspend collection of student loan payments. This suspension of collections was extended on August 8, 2020 and again on December 4, 2020 and is expected to expire on January 31, 2021.
Taxpayers may want to make a payment before year-end to take advantage of the student loan interest deduction. The interest likely stopped accruing on your loans at the same time, but if you had interest that was capitalized, then you may still be able to take advantage of it. So, if their original loan was $50,000, but the current amount due is $60,000, then that $10,000 is likely capitalized interest or other deductible amounts. You’d need to look at their particular account to see how a payment will be applied, but for tax purposes a payment to “principal” can be applied to capitalized interest first.
Aa a result, many clients will have only 1/3 the amount of student loan interest deduction that they’ve had in the past. Remember that you’d need to pay enough to hit the $2,500 deduction amount after taking into account what you paid earlier in the year.