Keep in mind that the interpretation of not taking prior-year scholarships is a conservative one. I personally think you should be able to make the withdrawal penalty-free and pay the taxes on earnings, and you'll probably be fine, but I'm not the one at risk of audit!
You're better off using the assets for graduate school, regardless. 529 funds can be used to pay for graduate or professional school tuition and other qualified higher education expenses, including tuition, fees, room & board, books, supplies and equipment, as long as the student attends an eligible educational institution. It does not matter if your student receives a taxable scholarship or income from an assistantship. This will also let you withdraw those funds both penalty AND tax-free.
VP, Research & Development
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.