Q. Am I allowed to reimburse from 529 for the loan amount of $10,442 since it was used to pay for tuition expenses?
A. Yes. Essentially, you have discovered a tax loop hole. Since you actually had $10,442 of qualified expenses, you may take a qualified distribution from the 529 plan for that amount. The fact that you also borrowed money, in that amount, is not relevant (scholarships received are handled differently from loan money received).
Q, If allowed, does it count toward the lifetime limit of $10,000 in student loans pay off.
A. No, because you didn't make an actual loan payment
When you pay off the loan, even after graduation, you will be allowed to take another tax free distribution from the 529 plan, up to $10,000. That's the loop hole.
