When TurboTax asks Is This her first year of college?, it's only asking in order to then ask if she received the American Opportunity Credit (or Hope Credit) in a prior year, and if so, for how many years. The AOC is only allowed to be taken in four tax years (in other words, on four tax returns max); that's why you're being asked this. So the answer to the question is that 2016 is not her first year of college. But the calendar years attending school don't matter in and of themselves.
In addition, the AOC can only be claimed for the first four years of post-secondary education, but those are measured by the number of credits earned (thus freshman, sophomore, junior, senior). So, again, the calendar years attending school are not an issue.
