Q. How do I answer “Was any of the scholarship income not designated to pay 2019 education expenses?”
A. You answer no. Although the $5390 was for the first term in 2020, it was billed and paid (by scholarship) in 2019. It is a wash, so it doesn't matter.
The difference between box 5 and box 1 is taxable, unless you have other offsetting expenses, typically books and other course materials. See below for an option.
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There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $10,000 in box 5 of the 1098-T 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 $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
