Yes, that would become income. It must be Qualified tuition and related expenses to not be taxable. QTRE includes book and other supplies needed for class purchased outside of the university. You may have other expenses that qualify.
Honestly, if you qualify for the Lifetime Learning Credit, you would do better to claim the entire scholarship as taxable on her return, she may not even have to file and you claim the credit. The IRS has a great brochure that explains how scholarships and tax credits interact.
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