What happens if my child receives a scholarship to school?

A 529 isn’t limited to paying undergraduate tuition. You can also use it to pay other college-related expenses, including dorm fees and books. If the scholarship covers all expenses, you can change the account beneficiary or withdraw the money for a different purpose. However, if you withdraw the money and use it for something else, a 10% penalty and tax will apply to the investment's earnings. The 10% penalty is waived on withdrawals up to the scholarship amount. Earnings are still subject to income tax.