@aasuen11 said "As I see it, stipend monies used on tuition are considered tax exempt (because they were used for qualified education expenses) and loan monies used for living expenses are not taxed because, well, they are loans".
Q. I want to know if this is a legally acceptable way to consider a major portion of my annual stipend as tax exempt.
A. Yes. It's that simple. Because the scholarship (stipend) is reported on a 1098-T, your "proof" is easier, if ever needed, But even when the stipend was reported on a 1099-Misc, you were allowed to do that. You can file amended returns to change past years, if beneficial.
Q. Must government student loans always be applied to tuition?
A. No. Borrowed money is your money and you can spend it or apply it, at tax time, any way you want to. There is no timing requirement for loan money. Stipend (scholarship) money must, generally, be applied to expenses in the year received.
However, tuition paid with tax free scholarship money is not eligible for a tuition credit. That's irrelevant (for grad students) if you don't have enough taxable income to have a tax liability to take a credit against.
