1098-T deeming entire scholarship & grant funds as taxable income

You can just enter the taxable scholarship amount and skip the room and board questions. The education section can get complicated with all the potential variations and you were smart to catch an issue. Any amount not used on qualified education is taxable. 

You can really simplify it by having box 1 blank and box 5 the taxable scholarship then skip the rest of the questions for other expenses, room and board, and so. They can all be blank. The education section of the program is just the program asking questions. Your forms being correct are the key.

You can enter income and expenses and work your way through, being careful to not double count the taxable income.

You might be leaving a portion for your parents to claim education expenses and the program was trying to use it. I can't see what you did to know for sure.

Typically, TurboTax (TT), allocates some of the tuition to the education credit.

 In addition to entering numbers, you must complete the “Education Information” sub-section. In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K). You can change it for the amount you want to allocate to the ed credit, including changing it to 0.

 If your parents claim you as a dependent, they can claim the credit, even though you're on scholarship.  In that case, you put $4000 in that box.

Using the short cut described by AmyC ("You can really simplify it by having box 1 blank and box 5 the taxable scholarship then skip the rest of the questions for other expenses, room and board, and so"), you would add $4000 to the box 5 amount you previously calculated. 

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There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this  if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.