My understanding of why Shirley's National Merit Scholarship didn't count against team scholarships: Every Iowa high-schooler who was a National Merit Scholar was eligible for a full-ride academic scholarship from Iowa State. There was no qualitative aspect to it -- his PSAT scores were high enough or they weren't. Because the scholarship was available to anyone in the state who met the test-score requirements, he was allowed to accept it and still be a walk-on.
Whether that's still true or not, I don't know.
Paul Shirley isn't from Iowa.