Yes, scholarship income is taxed, both at the state and federal level if not used for education expenses.
Box 1 is tuition received by the school.
Box 5 is scholarships paid to the student.
If box 5 is larger than box 1, there would be excess (taxable) income.
The federal tax might not change because the federal 1040 has a different income level and tax rate than a state return.
Don't forget to also add the expenses for books and supplies she may have purchased.
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