When scholarships and grants are used for qualified expenses, as that term applies to scholarships and grants, they are not taxable. Tuition and some (but not all) fees are qualified expenses for scholarships and grants. You cannot take money from a 526 account to cover expenses that have already been paid by tax-advantaged funds, like a grant, without paying taxes on the earnings portion of the 529 distribution that equals the part of the expenses paid with the tax advantaged funds. Using your situation as an example, if you took $16k from the 529 account, $10k of that would be a non-qualified distribution, because that amount was already paid for using a tax-free grant. If at the time you took the non-qualified distribution 70% of your 529 account balance was contributions and 30% was earnings, $3k of the non-qualified distribution would be taxable because that amount represents the earnings portion of the non-qualified $10k distribution. Note that because a penalty exception applies, you would not also have to pay the 10% penalty for taking a non-qualified distribution. Clear as mud, right?