Leveraging Savings Bonds to Offset Education Costs

Savings bonds are often something that people have access to either because they purchased them directly, or because they were gifted years ago by a loved one. However, it can be stressful to decide what you want to do with savings bonds after they’ve matured.

How Do Savings Bonds Work?

U.S. Savings Bonds are a way for the government to allow citizens to “buy” federal debt. This helps the United States continue to fund various initiatives. For example, Series E War Bonds were very popular during World War 2, when the government needed to immediately fund military efforts overseas. Savings bonds can still be purchased today through TreasuryDirect.com, but investors can only purchase up to $10,000 in a calendar year.

Bonds can usually be redeemed 12 months after they were initially purchased. However, most investors wait to redeem bonds until they’ve matured – between 15 and 30 years depending on the bond type you’ve purchased. In general, there are three different types of savings bonds currently available or in circulation:

  1. Series EE US Savings Bonds.
  2. Series I US Savings Bonds.
  3. Series HH US Savings Bonds (note: these are no longer available for purchase, but are still in circulation). 

Series EE savings bonds are worth their face value at redemption, and mature at a fixed rate of interest. Series I savings bonds, on the other hand, offer a rate of interest subject to inflation. If you own savings bonds, you can find out what they’re currently worth (and if they’ve matured) by using the Treasury Direct’s redemption table. 

Leveraging Savings Bonds for Education Expenses

Wondering what to do with your savings bonds? Often, cashing them out and using the funds for a small financial goal is what most investors do. However, bondholders will owe taxes on any interest earned when they redeem their bonds. One way to sidestep this is to leverage your savings bonds to cover education expenses. 

When you redeem your bonds, you can claim an education tax exclusion that allows you to exclude the interest paid to you upon redemption from your gross income if you meet the following requirements:

  1. You redeemed your bonds the same year that you’re claiming the exclusion. 
  2. You paid higher education expenses at a qualifying institution for yourself, your spouse, or your children. 
  3. You are not filing as “married filing separately.” 
  4. Your modified adjusted gross income was within the annual limits set by IRS Form 8815
  5. You were 24 years or older before your bonds were issued.
  6. The bonds you redeemed were Series EE or Series I bonds issued after 1989.

Note that if you received the bonds as a gift, and you were under the age of 24, neither you nor your parent can claim the exclusion. 

Looking For More Information?

Treasury Direct is a wealth of information about all things savings bonds. Whether you have questions specifically about the education tax exclusion, or you just want to understand how to redeem the bonds you have, visiting their Treasury Securities & Programs center is a fantastic place to start. 

Have questions? We’re here to help! Contact us today by clicking here.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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