In a tax year where the taxpayer pays qualified education
expenses, interest income on the redemption of qualified US
Series EE Bonds may be excluded from gross income. The exclusion
is subject to a modified gross income limitation and a limit
of aggregate bond proceeds in excess of qualified higher education
expenses. Which of the following is (are) true?

I. The exclusion applies for education expenses incurred by
the taxpayer, the taxpayer’s spouse, or any person whom the
taxpayer may claim as a dependent for the year.

II. “Otherwise qualified higher education expenses” must be
reduced by qualified scholarships not includible in gross income.

(c) The requirement is to determine whether two statements
are true concerning the exclusion of interest income on US
Series EE Bonds that are redeemed to pay for higher education.
The accrued interest on US Series EE savings bonds that are
redeemed by a taxpayer is excluded from gross income to the
extent that the aggregate redemption proceeds (principal plus
interest) are used to finance the higher education of the taxpayer,
taxpayer’s spouse, or dependents. Qualified higher educational
expenses include tuition and fees, but not room and board or the
cost of courses involving sports, games, or hobbies that are not
part of a degree program. In determining the amount of available
exclusion, qualified educational expenses must be reduced by
qualified scholarships that are exempt from tax, and any other
nontaxable payments such as veteran’s educational assistance and
employer-provided educational assistance.