Yes, the Lifetime Learning credit may be taken.
As far as her income is concerned, it depends on what she did with her earnings, used it to pay half her own support or put it into savings.
Reduce her education expenses by your distribution.
You needn't enter the 1099-Q if it is not taxable.
According to the IRS:
“Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.”
You say you paid 15,000 after accounting for the scholarships.
8,000 is the distribution which would leave 7,000.
The Lifetime Learning Credit maxes out with 10,000 expenses.
Distributions can be used for Room and Board, and I don't know if you factored that in. The student does not need to be living in a dorm. Room and Board can be applied to a distribution for rent and food up to the amount of on-site school housing.
These adjustments can be made several ways.
The easiest is don't enter the 1099-Q,
Adjust the numbers on the 1098-T if needed.
If the distribution is allocated to tuition, lower Box 1 on the 1098-T
If the distribution is allocated to Room and Board, report the full amount of Box 1 on the 1098-T
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