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Q. Can TurboTax (TT) properly separate out up to $10,000 of earnings from a Section 529 Plan distribution that was used to pay qualified student loans and not tax those earnings? A. Yes.     Q. TT doesn't offer anywhere to indicate the funds were used to pay student loans? A. You should have been asked that question in both the 1099-Q section and the 1098-T section (if used).      The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you probably can.  You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including student loan payments, up to $10K, to cover the distribution. 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 (you don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. 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”. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

From what you described, TurboTax (TT) is doing it correctly.    Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free.  Scholarship amounts that exceed QEE is taxable income, on the student’s tax return. Room & board are not QEE. If box 5 of the 1098-T exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses.

Linda please stop posting nearly totally incorrect information.  The only option to downgrade to DIY from the assist level after you start entry is this https://ttlc.intuit.com/turbotax-support/en-us/help-article/change-service-level/c[product key removed]tax-online/L37BZFuBV_US_en_US   Then you must locate the deceitfully small link to the other tax options and hopefully find the DIY choice. 

If box 1 is $1500 more than box 5, you should be getting $300 Lifetime learning credit (LLC), $1500 x 20% = $300.  If you're getting more than $300, TT has shifted some (or all) of the scholarship to being taxable to free up more tuition for the LLC.   It's unusual that TT would do that, but not impossible.  Depending on your tax bracket, that may be a good thing.  If you said, in the interview, that some of the scholarship was used for room & board (R&B), that would make that amount taxable. R&B are not qualified expenses for a tax free scholarship.    You could try deleting the 1098-T and re-entering it. 

I did that but Turbo Tax automatically began filling in information for my state return. I don’t want Turbo Tax to do that return & be charged for it. In prior years, there was an option to skip the state return & file the federal return. I don’t see that this year. Can you show me a screenshot of the instructions from the link you posted where you can go to “Tax Home”, find status of state return & then delete it, as I’m not seeing that on my screen? Thanks!

If using desktop TurboTax, here's a FAQ with info on the Live Tax Advice feature that @ VolvoGirl shows in her image above.   FAQ:  Desktop TurboTax Live Tax Advice https://ttlc.intuit.com/turbotax-support/en-us/help-article/experts-advice/turbotax-desktop-live-tax-advice/L2nvxpA4W_US_en_US   After you pay the $60 for that feature: To get started with an expert, select Connect with an expert and you'll be able to request a phone call. When an expert calls you back at the assigned time, you can ask unlimited questions and get help with this tax return.

@Hal_Al I finally figured out what was going on and I feel dumb for not realizing this earlier. I had forgotten the phase-out for the AOTC credit as AGI approaches 180K for joint filing. With this phase out the AOTC amount is reduced to $535 rather than the full $2500. So under these conditions it would indeed be better to not enter the 1099-Q or 1098-T for my return since the $535 from the AOTC is not enough to offset the additional tax liability from the $4000 that would be counted as taxable income to get the AOTC credit. We will still go ahead and report the scholarship from box 5 of the 1098-T on my son's return since that is income that needs to be reported somewhere.