That's a good question. I would think you point is substantial enough that's it's been addressed by more authoritative people than me. I would think you need to address that question to the people that administer the program.
That said, I think they're doing you a favor putting in box 5 of 1098-T so that you can call it a tax free scholarship. My reading of Pub 970 is that they should be imputing it as income on your W-2. From page 6:
"Example 2. You are a candidate for a degree at a medical school. You receive a scholarship (not under any of the exceptions mentioned above) for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received."
