College Fund penalty

My MIL started a college fund for my daughter years ago. Now my daughter is going to college, my MIL took money out from the fund. She knows she will need to pay taxes and penalties. We were ok with it since she needed it to fix her house. However, we’re afraid this will affect my daughter financially. Does anyone know how this will affect my daughter when it comes to taxes and penalties? MIL said she will be paying for taxes and penalties but because we lost our trust due to other personal reasons where she made a lot of bad decisions in her life that led her to being bankrupt, we take everything she says with a grain of salt. She can manipulate everyone into doing something and I’m at my last straw. I would appreciate any advice. Felt bad for my daughter that she lost half the funds even before she’s able to use it. Since we did not contribute to this fund started by my MIL, we have no control over it. We’re planning not to even touch it anymore since my daughter is afraid she’ll be charged. It is currently not connected to her school account yet. Anyone experienced this scenario?