I didn't know I couldn't contribute to a Roth IRA on my current income (a 'taxable grant' because I'm essentially a graduate student). I'm going to withdraw the money instead of pay the fee, since I have zero earnings from the fund to get taxed. I lost about $200 because of the current economy, so right now what I can withdraw is less than my original contribution. How can I avoid paying the penalty that automatically comes up because of the disrespectancy between my contributions and withdrawal
You need to enter the full amount that you contributed as the amount that was withdrawn. The amount you withdraw will not show on your tax return, so it will not create a problem with respect to a wrong amount listed on your tax return.
Also, if the ROTH IRA was your only retirement account, you can deduct the loss as a loss on investment (capital loss). You would report it in the "Investment Income" section, and then "Stocks, Mutual Funds, Bonds, Other."