Correct. You would not pay a penalty on the distribution if it was used to pay tuition or it was not used for education expenses only because the student received a scholarship and/or education credit.
According to the IRS:
Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in
income.
Exceptions. The 10% additional tax doesn't apply to the following distributions.
1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.
2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.
3. Included in income because the designated beneficiary received:
a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);
b. Veterans' educational assistance (see Veterans' Benefits in chapter 1);
c. Employer-provided educational assistance (see chapter 11); or
d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.
5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier). Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment."
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