You need to appeal their determination if it's not too late. You should have an attorney help you with this process. If legal fees would be an issue, Prairie State Legal Services may be able to help you navigate the process. I believe the closest office to you would be in St. Charles. See if you can get in touch with your prior caseworkers as often DHS and similar agencies have internal communication problems. Stay on top of this and be aggressive. Best of luck to you and congratulations on the scholarship.
I hope that this answer helps you in a general sense, but it does not constitute legal advice, nor tax advice of any kind, and does not create an attorney-client relationship between you and myself or my firm.
Get statements from people he lived with to show he was not living with you. Appeal any adverse decision. If they start trying to make this a fraud case, get a lawyer.
The information you obtain from this website is not legal advice.
You may be about two thirds right and about a third wrong. Since you're not swimming in money, check the NIU Law School for some clinical assistance. Clinic will LOVE your case, a lovely marriage of constitutional due process and administrative law. You will not come out entirely unscathed but your will not be steamrolled into the stone age either. Push the school thing. Don't let anything stop that. You will survive this.