The program is asking how you want to handle the tax-free assistance first.
Of the $4,100 tax-free assistance, how much of that do you want to apply to Room and Board?
Whatever you don't apply to Room and Board, will be applied to tuition.
You don't say what the tuition and fees amount paid to the school is. You should have gotten a 1098-T, which you would report. You also want to check the student's school account records.
The American Opportunity Tax Credit is the most valuable credit, and the maximum credit is based on $4,000 worth of education expenses not paid with tax-free assistance.
If your son's 2016 tuition was $4,200 (2,500 + 1,700) then you might want to apply $3,900 to room and board. This would apply 200 to tuition, leaving 4,000 tuition to apply to the credit. The 3,900 used for room and board is reported as taxable income on the student's return.
The credit should be more valuable to you that what the student needs to pay as tax on the scholarship income that went to room and board.
The IRS is lenient about allowing taxpayers to claim the best education credit they are eligible for.
Click the link below for examples the IRS gives for maximizing the credit by allocating tax-free assistance as taxable income for the student.
CLICK
HERE for IRS Pub 970 Tax Benefits for Education
