My client is able to take a large tax-free 529 distribution this year against her daughter’s Qualified Educational Expenses (QEE) for med school this year (fall semester of last school year). However, my research suggests that this distribution will re-characterize all the student loans taken this year from “qualified educational loans” to “personal”. I’m not so much worried about the interest not being deductible, but more about what happens to her ability to re-finance her loans and qualify for debt forgiveness, etc. Have you heard of this? Who would have a definitive response to this? Thank you for any help or insights you can offer.

Basic details - QEE is $100k; Scholarships are $50k; Student loans are $50k. 529 distribution of $50k is not taxable because QEE - Scholarhipships = $50k. However, the Treasury Regs for qualified student loans require one more step - subtract the $29 distribution = $0k QEE for loan purposes.  Therefor loan is re-characterized to personal. What a bummer.