The best way to understand it is to read IRS Pub 970.
The TurboTax program tries to do the best bang for the buck when the taxpayer clicks "Maximize My Tax break" but it could not possible list all the possibilities.
There are "Qualifying Education Expenses" such as Tuition, Fees, Books, and Supplies.
Education credits are based on these expenses.
If there is an education credit, the Taxpayer claiming the student gets the credit.
There are scholarships reported on the 1098-T box 5
There are distributions from 529 plans reported on 1099-Q
Scholarships and Distributions can be used to pay "Qualifying Education Expenses" OR "Non-Qualifying Expenses" such as Room and Board.
If allocated to room and board, the amount is taxable income that the student needs to report.
So there you have it, allocate aid to "Qualifying Expenses" and the aid is tax free but expenses can't be used for a credit.
Allocate to "Non-Qualifying Expenses" and the parents can use the freed-up qualifying expenses for a credit but the student needs to claim the aid as income.
IRS PUB 970
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