1. Tuition you pay is eligible for credits, if you meet the other eligibility requirements. If you pay tuition with gifted money, or with money you borrow, it is still considered that you paid the tuition.
2. If you treat this as a gift, then it is not taxable to you or your sister. Your sister must report gifts given of more than $15,000 per person per year. This is a reporting requirement only, and no gift tax is actually owed, unless your sister's total lifetime gifts is more than $11 million. The gift tax form just reports the gift to count it against the lifetime limit. Turbotax does not include this form in a regular tax return, it is a separate form. The recipient does not have tax or reporting requirements.
3. If you treat this as a loan, the IRS requires that you conduct business in a businesslike manner, and that includes paying interest on loans. You pay the loan back with interest, and your sister reports the interest as taxable income. There are web sites and spreadsheet formulas that can calculate a schedule for you with an amortization table showing the interest and principle. If your sister does not charge the IRS minimum interest rate (which is around 3% APR) then she is still required to report and pay tax on "imputed interest" -- the interest income she would have received if she charged the IRS minimum rate.
4. If you pay interest on a loan that you used to pay qualified education expenses, you can take the student loan interest deduction (if you meet the other eligibility requirements of course). The loan doesn't have to be from a specific kind of student loan lender. But, there must be a close association in time and dollars between the tuition and the loan. If you borrow $40,000 and pay $40,000 in tuition, you can deduct the interest. If you borrowed $40,000, and used some to pay tuition, some for a vacation, some for personal expenses, and so on, then you lose the entire interest deduction. You and your sister would need to keep excellent records of the loan and the interest in this case.
5. If you claim this is a gift when it is really a loan, the IRS probably won't care, since its within the family. But technically, if your sister is audited, they could tell her it should have been classified as a loan and she should have reported and paid income tax on the interest.
(Finding the IRS minimum rate to avoid imputed interest is actually very tricky. 3% APR is probably a safe approximation. Most of the rates are between 2% and 2.5% last time I checked, but they have a lot of different interest rates for different kinds of loans and it is a variable rate that changes every month.)
