For 529 plans, there is an “owner” (usually the parent, but the grandparent in your case), and a “beneficiary” (usually the student dependent).
The simplest thing is to transfer the owner from you to the student. You'll need to contact the plan administrator to see if this is allowed.
As you (or the student) make non qualified distributions, the earning portion (shown in box 2 of the 1099-Q) will be taxable and subject to a 10% penalty. The 10% penalty is waived for any scholarship amount. But the scholarship iis compared to the total distribution (box 1 of the 1099-Q) not just the earnings portion. Using an example: Box 1 is 40,000, box 2 is 25,000. Student had 30,000 of expenses, all paid by scholarship that year. $25,000 would be taxable and 30,000/40,000 x 25,000 =18,750 would not be subject to penalty, The penalty would be (25,000-18,7500) x 10% = $625.
