She should claim enough of her scholarship as income to balance things out with Box1.
It is only a portion of box 2 that would, otherwise, get taxed. But the tax ratio is determined by the amount of the non qualified distribution.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q
Box 1 of the 1099-Q is $5000. Since you only have $3000 of expenses, $2000 of the distribution is non qualified. She would have to declare $2000 of her scholarship as taxable, to offset that.
