When you go through the education credit interview you will be asked if your student used the scholarship for room and board or other things. Click yes and report $1,500 that was used for non tuition expense. That amount will be income to your student but will not be taxed on his return if he has no other substantial income or very little. You will get the full $2,500 credit for spending $4,000 out of pocket. This is a legal loophole fully explained in the examples in Pub 970 if you want to check it out.
