Q1. If a student's scholarships were enough to cover tuition, fees, books and room and board, can they still claim the tax credit based on moving some of the tax-free scholarships to the taxable income of the student?
A1. Yes
Q2. must the family have been required to pay some portion of room, board or books?
A2. No. The "loop hole' does not require that the family be out of pocket
Q3 there an example in which the student has some scholarship money earmarked for tuition that cannot be moved but some scholarships that can be moved?
A3. The ear-marked money will not show on the 1098-T. It will be in your other documents. Modifying the previous example: Student has $10,000 in box 5 of the 1098-T (of which you know $5000 must be used for tuition) and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $5000 as income on her return, the parents can claim $3000 of qualified expenses on their return.
