Answers will depend on: Family income, the form of his financial aid, and some choices you make about what is potentially available. For example, there is something called a Hope Credit, but it's only available the first two years (if you qualify); there is also something called a Lifetime Learning Credit that can be claimed any year if you qualify and if you aren't claiming the Hope Credit. I'm not trying to confuse you. I'm just trying to say that there aren't any simple answers, and you'll have to do some reading. In my situation with a daughter in college a couple of years ago, I was paying a good part of her tuition and had taken out a Plus loan for more of her tuition: the only thing I qualified for was to be able to claim her as a dependent.

The IRS has a publication 970, Tax Benefits for Education, which is fairly clear and will help you figure this out. I just checked their web site and see that the only version of this seems to be for 2005 taxes, but I don't think much has changed, so you should check it out. You might want to call the IRS and see if they are planning on publishing anything new for the 2006 tax year.

As for the loans, you may or may not be able to deduct the interest (depends on your income), but let these go until they're due and pay with future dollars, or have him pay.

Here is a link that might be useful: Tax Benefits for Education

Thanks for the info. I'll have to check into it further. I am still confused about being able to deduct the tuition with not paying anything on it yet. On his 1099-T it has tuition amount and then $0 paid on tuition. He has to turn in his scholarships? Basically it is a private college that charges higher than normal tuition but then gives a generous amount in scholarships.Like Alumni, Presidents,Ohio grant, etc... He did not qualify for a pell grant.
Maybe I need to take the taxes somewhere the first year to see what they do with them.
Again, thanks for the help.

loralei-
It looks like the link I supplied above has changed. Hope the one below works.

It might not be a bad idea to get professional help...if the preparer is really familiar with this stuff. I use an accountant who is really good but he missed some of the education-related stuff that my daughter could claim in later college years when she was making enough money to file taxes. I only caught it because I skimmed through Publication 970. If you get assistance, I suggest you protect yourself by first flipping through that publication and jotting down notes on things that might apply to you.

And when you do get into it, be prepared: you may be assuming that a bunch of college-related expenses that you thought would be deductible simply aren't.

Here is a link that might be useful: Tax Benefits for Education

If his tuition was paid for with the scholarships, you can't claim the credits. If only part of his tuition was paid for with scholarships, you can claim a credit (either Hope or Lifetime Learning) on the part you paid or to out a loan to pay. You cannot claim an Education credit for room, board and most books.

The Hope Credit can only be claimed during the years that a student is classified as a freshman or sophomore during some part of the year and you can only claim it for 2 years. You cannot claim both Hope and Lifetime Credits for a student in the same year.

In general the scholarships aren't taxable to the student as long as he used them to pay tuition. If the scholarships were used to pay room and board or books, then they may be taxable on the student's return.

Your son will claim the interest on the student loans when he starts making payments on them. The credits will be on your return as long as you claim him as a dependent. If your income is so high that the credits are phased out for you and your son has income, the situation becomes more "interesting".

I've just touched the tip of the education credit iceberg and didn't even start on the tuition and fees deduction. If you have more questions, please ask.

So we can claim the Lifetime learning credit on the balance the scholarships did not cover even thought we have not paid on them yet? Then our son can deduct the intrest once he starts paying on loan in 2010?
Which do you think is better? The Hope or Lifetime?
Should he start paying on the loans now or let them ride?

Please, consult your accountant before you do your taxes. There are a lot of variables at this point (and in our case the family taxes were even more complicated by the fact that dd worked as a waitress--always a challenge to figure the taxes!) Your accountant knows the various in's and out's of what you can deduct, how you'll get the maximum benefit. If yours is anything like ours, you'll save many times his fee by using him.

Oh--I'm talking about a real tax accountant--not someone in a storefront who got a few weeks crash course on tax prep. My accountant is actually cheaper than the popular storefront tax place that pops up in every shopping center this time of year.

There is nothing wrong with a store front tax preparer that has years of experience. There are even EA's working at the major chains. If you go to a chain, ask for an appointment with someone that has more than 4 or 5 years of experience. Actually a 2nd or third year preparer should be able to handle the education expenses and the waitress income.

Yes, the store front tax prep places tend to be expensive. The big CPA firms are even more expensive.