Q. Is it true that you don't have to deduct loan proceeds from QHEE for 529 withdrawals?
A. Yes. As you said, loan proceeds count as student's (or parent, if they co-signed) payment for AOTC.
Q. Will a student still be allowed to pull money from the 529 to pay back the (subsidized) loan, when the loan never actually paid for any QHEE (or the QHEE was used to claim the AOTC)?
A. Yes. It's a loop hole that essentially allows that double dipping. That may be why there's a $10K cap on that provision. You cannot, however, claim the (up to) $2500 student loan interest deduction, if you used 529 funds.
Q. I know loan proceeds count as student's/parents' payment for AOTC?
A. Correct. Nothing about loans will be on the 1098-T.
