Q. I was wondering if there is also an additional 10% penalty when we pull out the money to pay for her schooling expenses since her school is not on the approved list.
A. Yes, because it is a non-qualified distribution.
Q. Also, can the distribution be made directly to her - thus making her the one to pay tax (at her much lower tax rate)?
A. Yes, as long as she is not covered by the the "kiddie tax". Generally, the kiddie tax applies to all children age 18 or younger, as well as to full-time students who are between 19 to 23 years old and whose earned income is ≤ 50% of his/her support, regardless of whether they are your dependent. Even when the kiddie tax applies, a small portion of the income is taxed at the child's rate.
As others, have suggested, you can consider a beneficiary change.
https://www.savingforcollege.com/article/how-to-change-the-beneficiary-on-your-529-plan#:~:text=529%....
An ownership change may also be allowed. Check with your plan administrator.
