How to Pay College Expenses with Savings Bonds - dummies

How to Pay College Expenses with Savings Bonds

You may use any sort of U.S. Treasury bonds, notes, and T-bills to pay for college expenses. Only Series EE and Series I savings bonds can be used to pay for postsecondary education costs without having to pay federal income tax on the interest that you earn on your investment.

Regardless of whether you manage to avoid paying federal income tax on the interest earned on your savings bonds, you won’t pay any state income tax; all interest earned on U.S. Treasury obligations is free from your state income tax.

Series EE savings bonds are your old-fashioned, garden-variety sort of savings bond. You may redeem them to pay for some college expenses without paying any federal income tax. In addition, they have the following features:

  • They’re issued at 50 percent of their face value. This means that a $100 bond costs you $50 to purchase.

  • They’re offered in a variety of face amounts. They range in face value from $50 to $10,000.

  • They’re guaranteed to reach their face value within 20 years. But they’ll continue to earn interest after they’ve reached that value until the bond is 30 years old.

  • Their issue date is always the first of a month, no matter what day of the month you actually purchase the bond.

  • Interest is compounded semiannually and is paid only when the bond is redeemed. Interest rates are announced every May 1 and November 1 for the following 6-month period.

  • You may cash the bond at any time, provided it is at least 6 months after the issue date for a bond issued prior to February 1, 2003, or 12 months after the issue date for a bond issued after that date.

  • You may exchange a Series EE bond for a Series HH bond at any time. You can defer the income tax on the accumulated interest in the EE until the HH reaches maturity. This can extend your tax deferral up to 20 years.

  • You may not purchase more than $30,000 face value ($15,000 cash value) of Series EE bonds in any calendar year.

Like Series EE bonds, Series I bonds may be used to pay some college fees if you can meet all the requirements. Although they’re very similar to Series EE bonds in many ways, Series I savings bonds have the following differences:

  • Series I savings bonds are offered at face value. You may purchase them in denominations ranging from $50 to $10,000, but you have to cough up the full face amount when you buy the bond.

  • They have no guaranteed return. Because you already paid $100 for that $100 face bond, the government doesn’t need to guarantee that you’ll receive $100 when you redeem the bond. What you will receive on redemption, though, is your original $100 investment plus the interest on that $100, calculated monthly and compounded semiannually, making the value of your bond grow and grow.

  • You may not purchase more than $30,000 face value ($30,000 cash value) of Series I bonds in any calendar year.

  • The only thing you may exchange this bond for is cash. You can’t turn it into a Series EE or a Series HH bond.