Yes, a 529 distribution can be used to pay off a student loan. It is neither a deduction or a credit. It is simply that the distribution will not be taxed or penalized.
There is a lifetime limit of $10,000 from a 529 plan that can be used without any penalties or tax consequences to repay the beneficiary's student loans, including federal and most private loans. An additional $10,000 can be used to repay student loans held by each of the beneficiary's siblings.
If you withdrew $10,000 or less, you do not even need to report the distribution. That is, you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including student loan payments. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. !
References:
- On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
