The order the forms are entered makes a difference.
The 1099-Q should be entered in Income first.
When you go through the TurboTax Education interview, you will come to a screen that says "Maximize My Tax Break"
When you click this, the program will figure the best credit. In your situation, it appears the best option is to tax the distribution (claimed as income by the student) and take the credit.
If you would rather not do this:
Go back through the Education Interview, click that last screen and allocate zero (0) towards a credit.
You can also type letme into the search box and then click the "Jump to letme" link. Here you can change the credit TurboTax suggest you take.
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