How 529 Plans Work With Scholarships and Merit Aid

The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs · May 28, 2026 · 10m · transcript

Lucas and Luna break down a frequently overlooked scenario: what happens when a student wins a scholarship or merit-based aid that reduces their qualified education expenses. They walk through the IRS rules on penalty-free withdrawals, the tricky timing of the scholarship offset, and how to avoid double-paying taxes. Using a real-world example of a $30,000 academic scholarship at a state university, they show how a family can pull out exactly the right amount from a 529 plan without triggering the 10% penalty. They also cover the interaction with the American Opportunity Tax Credit and why…