From [Publ. 970](http://www.irs.gov/pub/irs-pdf/p970.pdf), p. 14:
Coordination with Pell grants and other scholarships
Scholarships and fellowship grants that the student includes in income do not reduce the student’s qualified education expenses available to figure your American opportunity credit. Thus, including enough scholarship or fellowship grant in the student’s income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income.
See also p. 13:
Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant is not treated as tax free to the extent the student includes it in gross income . . . and . . . the following is true . . . The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses.