Freshman student parent CONFUSION

No, this does not mean you can't claim him. If he qualifies, you can certainly claim him. His scholarship isn't a factor.

From the Journal of Accountancy:

Does scholarship count towards support?

If the recipient is a fulltime student at a qualifying educational organization as defined in section 170(b)(1)(A)(ii) and “a child of the taxpayer” (section 152(f)(5)(A)), any scholarship is excluded from the support tests

Qualifying child

In addition to the qualifications above, to claim an exemption for your child, you must be able to answer "yes" to all of the following questions.

• Are they related to you? The child can be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or an offspring of any of them.
• Do they meet the age requirement? Your child must be under age 19 or, if a full-time student, under age 24. There is no age limit if your child is permanently and totally disabled.
• Do they live with you? Your child must live with you for more than half the year, but several exceptions apply.
• Do you financially support them? Your child may have a job, but that job cannot provide more than half of her support. 
• Are you the only person claiming them? This requirement commonly applies to children of divorced parents. Here you must use the “tie-breaker rules,” which are found in IRS Publication 501. These rules establish income, parentage, and residency requirements for claiming a child.
• .

Simple answers: you can still claim him as a dependent.  He technically  has taxable scholarship, but it is not enough to have to file a tax return. 

First the dependent question. Simple answer: he's still your dependent because he did not support himself.  Scholarships don't count as support (or are considered third party support and not support provided by either the student or the parent).

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

Scholarships that pay for qualified expenses (tuition, fees, books and other course materials, including a required computer) are tax free.  So, he has $11,456 grants less $5137 (+books etc) qualified expenses = $6319 (or less) taxable income. The filing requirement is $12,550. 

But wait; there's more. 

There is a tax “loop hole” available. 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 school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $11,456 in box 5 of the 1098-T and $5137 in box 1. At first glance he has $6319 of taxable income and nobody can claim the American opportunity credit. But if he reports $10,319 as income on his 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, he would only need to report $9,319 of taxable scholarship income.

If you use the loop hole, the student should file a tax return (even though he's under $12,550) to document declaring the scholarship taxable.