here are exceptions to penalty.

Certain nonqualified distributions are not subject to the penalty. These include amounts distributed:

• On account of the designated beneficiary's dying or becoming disabled;
• To reflect receipt by the designated beneficiary of a scholarship or an allowance or payment described in Sec. 25A(g)(2) — in other words, if the student is refunded money because he or she receives scholarships or the other specified forms of assistance, the plan need not impose any penalty on refunded earnings;