Savings Bonds: Bonds for Education

Buying Bonds
One way to accumulate funds to help pay for college costs is investing in U.S. Series I or Series EE savings bonds. You may purchase up to $15,000 a year in EE bonds and up to $30,000 a year in I bonds. At purchase time, it is not necessary to declare that they will be used for educational purposes.

There are tax benefits to investing in bonds for education. Interest on bonds is exempt from state and local income taxes, and Federal income tax on interest can be deferred until the bond is cashed in or matures. In addition, for qualified taxpayers, if the funds are used for qualified higher educational purposes, interest may be excludable from federal income tax.

When one is applying for financial aid at a college or university, the college’s financial aid officer will review one’s assets to determine the dollar amount of grants to award. If the parents own the bond, the value of savings bonds will be considered part of the parents’ assets if the parents are paying for their child’s education. However, the bond is part of the student’s assets if the student owns the bonds and if the student is paying his/her college costs.

Bonds used for education can be redeemed after owning them for six months, but there is a three-months interest penalty if the bonds are cashed in within five years of issuance.

Using Bonds for Education
Series EE and Series I savings bonds which you currently own can be used for college educational costs. The biggest advantage of this is Federal income tax exclusion options. It is possible to exclude all or part of savings bond interest from your Federal income tax with the following qualifications:

• You may use only Series EE or Series I bonds that have been issued on or after January 1990.
• You must have been at least 24 years old when the purchase took place.
• The bond must be listed in your name only or as a jointly owned bond with your spouse named as co-owner to use the bonds for your child’s education.
• The child for whom the bond is being used for college CANNOT be listed as owner or co-owner on the bond, but he/she may be listed as beneficiary.
• If the bond is registered in the child’s name, it is possible for you to request that it be “reissued” to your name. Fill out Form PD F 5387 for Series I or Form PD F 4000 for Series EE, have your bank guarantee your signature, and mail the forms with the bonds to a Federal Reserve Bank.
• If you are married, you must file a joint return to qualify for the educational exclusion of bond interest.
• On your Federal income taxes, you must report both principal and interest from the bond to pay for qualified expenses.
• Income limitations exist to qualify for the exclusion: up to $113,650 for married filing jointly and up to $70,750 for single filers.
• The student must attend a post secondary institution, college, university, or vocational/technical school that participates in Federal assisted programs in order for you to claim bond interest as an exclusion. Many beauty schools and secretarial schools do NOT qualify.
• Tuition, lab fees, technology fees, and sports fees qualify as expenses. Books, room, board, and expendables (pens, computers, paper) do NOT qualify as expenses.
• Grandparents may NOT claim the exclusion of bonds for their grandchildren unless their grandchildren are the legal dependants of the grandparents.