I believe that hardship distributions from IRAs do eliminate the 10% penalty tax for those who are under the threshold age for those distributions. Reasons for this include payment of medical expenses that are follow deductibility rules on the Schedule A, payment of health insurance premiums for the unemployment , buying ones first house, school expenses and other medical, funeral and disability related expenses.
I agree that it’s up to the schools how they choose to consider withdrawals from any qualified retirement plans, whether they meet IRS standards or not. It Almost always comes down to the individual college as to how they handle this