If you don't exclude the earnings, you are taxed on them on line 21. He is being taxed on the earning then, so its now taxable income. He is now using his income towards what he paid for college. The refundable credit is a windfall, no doubt. But what you describe is how it works. You can call it odd, but its not incorrect. In this case, adding taxable income on Line 21 essentially has nothing but a positive impact on his taxes. But, that doesn't mean he doesn't merit this credit.
Its correct.
