Q. If it is not an educational expense, could he claim it as rent paid? and if he does that, would he file it under our home state, or the state where he attends school?
A. No, or almost certainly no. Most state rent credits are for you primary home. A student, away at school, primary home is his parent's home and/or the place he was living before going away to school. School housing, on or off campus, is only temporary. Otherwise, you'll have to check the rules for your state(s).
Q. Is there another option I'm not considering?
A. Maybe. Books and other course materials, including a required computer are qualified expenses. You could "allocate" some of the scholarship money to those expenses. It is not necessary that you actually use that money for books, it's only necessary that you incurred qualified expenses.
Q. This university does not require its students to live on campus in a dorm, which is probably the reason it's taxable?
A. No. Housing and food are not qualified expenses not matter where or why. As the other reply said, room and board are qualified expenses for a 529/ESA distribution, but even then the scholarship would still be taxable (it's only the 529 money that would be tax free).
Depending on the amount of taxable scholarship and the source of his other income, he should get the full $13,850 standard deduction. For most students, this means that the first $13,850 of their "taxable" scholarship still goes un-taxed.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.
