When applying for any type of financial aid the FAFSA form must be completed. On this form you must disclose all of your income and assets. However, assets that are in a retirement account such as a 401(k) or IRA are not required to be listed on this form as they considered to be used only for retirement. So you will want to keep the assets in a retirement account prior to submitting the form.

If you withdraw the funds from the 401(k) then you will have to pay income taxes on the distribution and a 10% penalty if you are under age 59 1/2. However, if you have the funds directly rolled over to a traditional IRA and then withdraw the funds from the IRA when you need them to pay for graduate school expenses you will avoid the 10% penalty as this is one of the exceptions to the penalty tax. This exception is not available for distributions from a 401(k).

See page 54 - http://www.irs.gov/pub/irs-pdf/p590.pdf