What happens to money in my 529 Plan if my kid gets a scholarship?

If junior gets that full ride to Stanford, you will not pay a withdrawal penalty on the 529 money that you normally would for the amount of the scholarship. You just pay income tax on the money that was earned on the investments. And remember, you never pay taxes or penalties on the money you added to your account – those rules only apply to the money that was earned from investing.

More info: The Truth About Scholarships and 529 Plans