Yes, making part of a scholarship taxable by assigning it to R&B (or other non qualified expenses) does allow some part of the tuition to be allocated to the bonds. What you can't do is allocate room & board directly to the bonds and get the interest exclusion.
Using an example: box 1 of the 1098-T is $10,000, box 5 is also $10,000. By declaring all the $10,000 scholarship as taxable, you can allocate $4000 tuition to the AOTC and $6000 to the bonds.
If you also have a 529 distribution, you can allocate the room &board to the 529 distribution and allocate the scholarship to other non qualified expenses (transportation, clothing. recreation, other). To make some of the scholarship taxable (re-allocate some of the expenses), you must tell TT how much you want taxable by saying it was used for room &board. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
