Q. Are you saying that for Kiddie Tax purposes the scholarships are "earned" income and because he didn't really have any other significant unearned income his free and clear of the kiddie tax?
A. Yes. As you observed, taxable scholarship goes on line 1 of form 1040 with wage earned income.
You should look closer at the the tuition credit situation. If eligible there could be a lot more $ available (see below). On the other hand, if you just noticed the "refund meter", at the top of the page, change, they might have just been a temporary anomaly.
Review any forms (8863 or 8917) generated for details. The American Opportunity credit has a higher income limit ($90K / 180K MFJ) than the Lifetime Learning Credit or Tuition and Fees deduction.
If you did use some of his expenses to claim a credit or deduction, that night increase the amount. of scholarship, he has to claim as income.
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There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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.
