Yes, it's completely legal. Some loans or scholarships can only be spent on tuition, but plenty cover food, housing, books, and any other needs the student may have.
Sure. Financial aid is designed for the student to be able to provide for themselves while they attend college. If they receive enough to not be able to work, just remember, they will have to pay back the loans when they are no longer enrolled in school.
I am in the same situation right now as your brother and his wife. I also know another married couple in a similar situation. It is legal and common to live off of student loans.
Student loans are intended to cover room, board, and tuition while you are going to school. While living entirely living off the loans is expensive, it is allowed.
