On my 1098-t It says the scholarships grants exceeded payments received by the school. But I paid out of pocket after the scholarships were applied. Is this right?

It depends on whether or not the $2500 payment you made is reflected in Box 1 of the 1098T.  You may wish to contact the school to see if the $2500 payment has been properly recorded and listed in Box 1.

If not, you may request the school issue you a corrected 1098 T.    

Q. On my 1098-t It says the scholarships grants exceeded payments received by the school. But I paid out of pocket after the scholarships were applied. Is this right?

A. Yes. 

Box 1 of the 1098-T only shows the amount paid for qualified educational expenses (QEE), typically tuition and fees.  Other expenses paid, mainly room and board, are not QEE. Scholarships that pay for QEE are tax free. Any amount of scholarship over QEE is taxable income to the student.

So, it doesn't matter what you actually paid for, or think you paid for.  What matters is what expenses the scholarship is allocated to.  If box 5 exceeds box 1, you are considered as having not paid any QEE for the tuition credit, unless you re-allocate some of the expenses.  

 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”.

For instructions on how to this, in TurboTax, reply back with more info.  Are you the student or the parent?  If the student, why do you think you qualify for the tuition credit.

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim the (up to) $1000 refundable credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863.

https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674