College 2 scholarship can be counted against college 1 expenses, since they both occurred in the same year. I think @KrisD15 means the same thing when he said "FOR 2021, you DO NOT need to separate the expenses and payments for the grad and undergrad expenses."
So, how you report it depends on the numbers. You can do both: you can claim the education credit* and the student report excess scholarship as income. The student can even report more of the scholarship taxable on her return, in order to free up more tuition for the credit on your return.
*If the student received a bachelors decree, this is probably the 5th calendar year in school. You may have already claimed the American Opportunity Credit (AOC) the maximum 4 times. The less generous Lifetime Learning Credit (LLC) requires $10,000 of expenses to get the maximum $2000 credit (vs $4000 for a $2500 AOC).
