"I think these days most students have debit cards so it should be relatively easy to keep track of expenses." That is the source of the problem! Even the 1098Ts are sent to the students, usually electronically. Lots of Moms and Dads sit at my desk texting their kids to get that document to them ASAP. And debit card purchases at the college bookstore don't count for much. The bookstores sell sweatshirts, itunes cards, coffee, you name it. You need an itemized receipt, something the students will almost never be able to produce. Better for them to buy their books online where you can actually print out the order proving you bought books and not a milkshake.
I have a client right now with three kids in college who just won a no change audit for 2009 over 529 distributions. Now that he knows the kind of documentation required he's already gathering it for anticipated audits of 2010, 2011, and 2012. He makes too much to claim any education credits but had substantial distributions from 529 plans for all three kids each year. When responding to the 2009 audit the IRS wouldn't accept the T. They wanted the print out of the actual expenses, what was paid for what and when. One of the kids lives off campus and he had to get from the school the standard room and board expenses the Dept of Ed uses in its calculations for that school. Not one kid could produce receipts for books.
The T does have it issues, starting from its very first year when colleges had to issue it but didn't have to fill in any boxes. Remember that? Now there is a box for "amount billed" and another for "amount paid." What is the point? I also see a lot of adjustments for last year in the box provided. Financial aid often doesn't come through until January so that messes up last year's numbers. At least this year we can enter into the program that some of the billing was for the next year's tuition, so the IRS gets notice that the kid is a student the following year even if no T is issued. There has to be a better way.