“Can we as parents (claiming them as dependants) claim the amounts paid to the college for tuition paid by the loans?”----> You can deduct up to $2,500 in interest on a qualified education loan(most federal and private education loans would be eligible for this type of deduction, including all Federal Stafford and PLUS. Private student loans do not automatically qualify). The deduction is taken as an adjustment to income, so you can take the deduction as an above-the-line exclusion from income on form 1040 line 33 even if you don't itemize deductions on Schedule A of your 1040. The interest must have been paid on a qualified education loan for your dependents when the money was borrowed.
Please visit the form 1040 website here( go to line #33); http://www.irs.gov/pub/irs-pdf/i1040.pdf