Q. Why such a discrepancy on wages and SS wages?
A. "Regular" students who also work part time for the school are exempt from SS tax. It sounds like, that at some point, his status went from a "student working part time" to being a regular "employee who is also taking classes".
As to the 2nd question, the answer is simple: he is not eligible for either the AOC or the LLC. This is because his tuition was paid for by tax free help. It doesn't matter whether it's called scholarship or employer assistance or tuition remittance (which is what it really is), he can't claim it. Just don't enter the 1098-T. Technically the school erred in reporting the 1098-T that way (but it's done often).
The famous "loop hole" of declaring some of the "scholarship" taxable in order to claim the credit is not available in this case as the "scholarship" is restricted to tuition. Technically, the loop hole is not available because the assistance is not scholarship, but tax free assistance. Besides, grad students are only eligible for the LLC, so there wouldn't be much, if any, savings. The LLC is only worth 20%. His marginal tax rate is 22%. He might even have to pay more tax (I didn't do the calcs).
