TurboTax appears to be doing it correctly. It is not taxing the $10,000 scholarship. Instead, it is reducing the qualified expenses because $10,000 of those expenses were paid by tax free scholarship.
So, 43,920 / 52,628 = 83.45% of the box 2 (1099-Q) is tax free. 0.8345 x 31923 = 26,641. You have 31,923 - 26,641 = $5282 of reportable income. That should show on that "Qualified Tuition Program (QTP) Computation of Taxable Distribution" worksheet (page 3 line 7).
Note the alternative, at my earlier post: have the student report $10,000 taxable scholarship on his return. If he has no other income, the tax will be 0. You then avoid tax on the $5282.
