Bottom line: both of your student's distributions are qualified and you do not need to even enter the 1099-Q.
The 2nd daughter needs about $7000 of Room & board, books and computers to match the distribution. Even if she comes up a little short, the worst case scenario she has to declare a small portion of he scholarship taxable to free up a few dollars more of expenses for the 529 distribution.
The fact that you told the plan administrator it was nonqualified does not lock you to calling it nonqualified at tax time. That was just informational for their records. It was not sent to the IRS. You may want to contact them to change that, although I don't think it's necessary.
The fact that the grandparents are paying is not relevant. You get to count their money for tax benefits ( a tax free 529 distribution rather than the tuition credit, in your case).
There's always a risk of a IRS inquiry. Every case we've seen, in this forum, has been handle by the taxpayer showing that they had sufficient expenses. It's been noted that such IRS letters, on 1099-Qs have dropped off in recent years.
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You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
