I think the risk of tax for money taken out to compensate for scholarships is pretty low, as it is taxed at the student's income tax rate. I suspect my kids will not be making a ton of money in college, so their income tax exposure will be minimal.
Example:
20k of qualified college expenses.
6k of scholarship
20k removed from 529.
(For the sake of argument, I put 10k into the 529, now it is worth 20k).
I removed 6k "too much". 3k of that was "earnings" the other 3k was "principle". My child's income will increase by 3k that year. Assuming they are working a part time making a few hundred a week, there is not significant tax liability change when going from 10k to 13k of regular income per year.
If I had put the 10k into a taxable account and it had grown to 20k, I would pay 15% tax on the gains. So, 15% of 10k, instead of income tax on 3k. If there were no scholarships, I pay no tax on the money withdrawn for qualified educational expenses.
tl;dr The risk is your child might pay income tax on <I>some</I> of the 529 proceeds, vs you paying capital gains tax on <I> all </I> of the proceeds.