The short cut: On your return, enter the 1098-T with $4000 in box 1 and box 5 blank.
The long way isn't much longer. To make some of the scholarship taxable, you re-allocate some of the scholarship away from tuition to non qualified expenses (mainly, room & board). In the 1098-T interview, you will reach a screen asking if any of the scholarship was used for R&B. You must tell TT how much you want taxable by saying that much ($7277 in your case) 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.
The problem is that it is not clear in TurboTax. At that screen, "Did (student name) pay for room & board with scholarship or grant" there's a link "Is there a way to increase my credit" . If you click on that, it basically explains the loop hole technique.
