You will get better answers if you can be more specific as to what you are asking about. Are you asking about how scholarships can reduce Qualified Education Expenses? Are you asking about how scholarships received can be used to provide an exception to the 10% additional tax (“penalty”) when a 529 distribution exceeds Qualified Education Expenses? The 529 rules make no distinction between merit scholarships and need-based grants… both are considered tax-free educational assistance, which is the term that the IRS uses.