<p>That’s a good question. My initial feeling is that grants as part of a financial aid package and scholarships are two different things as far as 529 plans are concerned, and that financial aid grants will not trigger the noneducational purposes withdrawal exemption that you are asking about. Also, the withdrawal exemption only allows you to avoid the additional 10% penalty on earnings that are used for noneducational expenses. Whether the withdrawal exemption applies or not, any earnings not used for qualified educational purposes would still be subject to federal income tax.</p>