Typically this happens because TurboTax allocates the expenses ($2631 + 267 = $2898) to the tuition credit, allowing you to claim the American Opportunity Credit (AOC) on your tax return. That means there are no longer any qualified expenses left to allocate to the scholarship. What was tax free scholarship ($1789) is now taxable on the student's tax return.
If that is his only income, he will pay no tax. Technically, he doesn't even need to file a tax return. But you may want to have him file anyway to document the reporting of the scholarship income that allows your to claim the extra AOC. With those figures, the AOC is worth (up to) $1116 more than if he did not treat the scholarship as income.
