1. Only the first $4000 is used to figure the credit. So you would need to add $3427 to student one's taxable income and you don't need to add anything to student two at all. Student 1 will only need to file a return if their income is greater than that scholarship by $9,793.
2. It is irrelevant but the system will ask you about education expenses not included on the form.
3. Yes. They would be entered as though the student had a 1098-T with zero tuition and the scholarship amount in box 5. That carries the income over to other income.
[Edited 04/10/25 07:31 AM PST]
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