That question is asking if the scholarship was restricted.
Some scholarships MUST be used for a certain expense, like ONLY tuition. Those ARE restricted.
Other scholarships may be used for things like room and board. Those ARE NOT restricted.
Why does this matter?
When the program is calculating the education credit, it may suggest you allocate part of the scholarship towards "other education expenses" such as room and board. This makes that part of the scholarship taxable income, but the tax on the income could be less than the amount of the credit.
The education credits can be confusing since they can be manipulated several different ways.
If you want a better understanding of education credits, you might want to look over IRS Pub 970.
IRS Pub 970
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