Do you have any savings bonds? Those old paper bonds that some of our grandparents got us when we were born to help pay for college could be worth big bucks today.
If you’re in college or plan to go to graduate school, you can use those savings bonds for education to avoid taking out more student loans. Let’s take a look at how to use Series EE bonds for education tax-free, or how you use savings bonds to pay student loans faster — specifically:
- What is a savings bond?
- Can you use savings bonds for student loans?
- Do you have to pay taxes when cashing in savings bonds?
- How to use Series EE savings bonds for education tax-free
- Why you may want to keep those bonds a while longer
A savings bond is a tool used to loan a small amount of money to the government in exchange for interest. The first savings bonds were issued March 1,1935, after President Franklin D. Roosevelt signed a law authorizing the U.S. Department of the Treasury to issue a new type of savings security, the savings bond.
The first savings bonds, known as “defensive bonds,” were issued to help fund U.S. involvement in World War II. After the war ended, many Americans held their bonds so they would grow in value before cashing them in.
The Treasury Department currently issues Series EE bonds and Series I bonds. They are similar but have some important differences in how they earn interest. For the rest of this article, we will focus on Series EE savings bonds.
How Series EE savings bonds work
Series EE savings bonds are sold at face value and earn a little bit of interest each month. As of May 2019, the annual interest rate for Series EE bonds issued through Oct. 31, 2019, is 0.10%. While the interest rate is low, the bonds are virtually risk-free.
The Treasury Department guarantees that the bond’s value will double 20 years after issue, at which point it can change the interest rate or the way interest is earned. After 30 years, the bonds stop earning interest. So, for example, if you pay $100 for a Series EE savings bond in 2019, it would be worth at least $200 in 2039.
Savings bonds are issued in any denomination above $25. People can buy up to $10,000 per series in electronic savings bonds per year.
Through 2012, savings bonds could be bought through banks and other financial institutions, but now they can only be purchased online through TreasuryDirect.gov. Existing savings bonds can be redeemed through a bank or TreasuryDirect.
Because Series EE savings bonds are low-risk and guaranteed to double in value in 20 years, they are among the best savings accounts for a grandchild. If Mom and Dad keep the savings bonds safely tucked away until college, the child can use savings bonds to help cover educational expenses or pay off student loans.
Series EE bonds earn a small, steady amount of interest each year. If you’ve received an EE savings bond, you can see how much it’s worth using the TreasuryDirect calculator.
Interest rate on savings bonds vs. interest rate on student loans
Simply put, Series EE savings bonds are earning interest for the holder while student loans — whether federal or private — are charging the borrower interest.
While you’re earning interest at a 0.10% rate on Series EE bonds, the interest rate for federal loans ranges from 4.53% to 7.08% — and private loans will likely charge an even higher rate. That means that even though you’re making some money on EE bonds, it likely won’t compare to what you’re being charged in interest on your student loans.
If you’re considering using your savings bonds to pay student loans, keep in mind that they can help pay off some debt but likely won’t cover the entire cost. This is because the interest rates on federal and private loans are much higher than the amount you’re earning on your EE bonds for education. Also, if you cash in savings bonds that are less than five years old, you’ll likely be charged a penalty.
Conventional wisdom says it’s best to pay off higher-interest loans first and then move on to lower-interest loans. When you cash out your savings bonds, it’s smart to pay off private loans first because they have the highest interest rate. Then, with any leftover bond money, you can start paying down your federal student loans.
Interest on Series EE savings bonds is taxable on your federal tax return, but not at the state or local level. Through 1989 that was the rule across the board, but Series EE savings bonds purchased on or after January 1, 1990, have different rules when it comes to using your savings bonds to pay student loans for education.
In 1990, Congress created the Education Savings Bond program. Now, all savings bonds issued on or after January 1, 1990, can be redeemed tax-free if the money is used to pay qualified education expenses.
Tax advantages of savings bonds
In many cases, you’re required to pay taxes on any interest earned in a calendar year. However, one of the pros of using savings bonds to pay student loans is that you may not have to pay taxes on the interest earned. Taxpayers who are 24 years or older, and meet filing status and income requirements, can exclude the interest earned on savings bonds from their gross income if the bond was used toward qualified education expenses at eligible schools.
Additionally, savings bonds are exempt from state and local taxes, which is especially helpful for people who live in a state with a high income tax. Lastly, people can defer taxes on the interest earned until the bond matures at the 30-year mark or they redeem the bond, whichever occurs first.
Tax disadvantages of savings bonds
There are some tax disadvantages of savings bonds. Not everyone is eligible for tax breaks on EE bonds. Depending on how much you make as a single taxpayer or a married taxpayer filing jointly, you may not be eligible for the tax advantage. If you’re single and your gross income is $94,550 or more, or if you’re married and your gross income is $149,300 or more, you won’t be eligible for the tax exemption.
Let’s say you are a college student enrolled at a major university or trade school. If the school is qualified for federal student loan programs like federal Stafford loans and federal Perkins loans, you are eligible to cash in your savings bonds for education tax-free. (Note that the Perkins loan program was closed to new borrowers when it expired Sept. 30, 2017.)
The loan proceeds must be used for tuition and fees directly related to your degree program. The funds cannot be used for books, room and board or other extracurricular activities, like clubs and fraternity dues.
If you cash in savings bonds in a single calendar year that have accrued more interest than you need (only interest is taxed, not the original principal), any excess interest is taxable. For example, if you redeem savings bonds that have earned $10,000 in interest and your tuition and fees were $9,500 that calendar year, you would pay income tax on the remaining $500.
If you have any questions on how to handle your taxes, consult a qualified tax expert.
If your savings bonds are less than 30 years old, they’re still earning interest. If that’s the case, you don’t have to cash them in. Instead, keep on earning that interest.
If you have college tuition and fees in your future, you can keep those bonds until you incur qualified education expenses and redeem the EE bonds for education in those years to keep your tax bill as low as possible.
If your savings bonds for education are more than 30 years old, you are typically better off cashing them in and investing the proceeds, unless you are in a unique tax situation where that would not be beneficial. Again, talk to a qualified tax expert if you are not sure.
If you are somewhere in the middle (your bonds are still earning interest but you don’t qualify for the tax exemption or you don’t have education expenses in the foreseeable future), you’re in a gray area. If you are done with school and have student loans to pay off, consider cashing in your bonds and using the money to pay down student loans.
Just remember that you’ll have to pay taxes on the interest earned on your bonds, so put some cash aside to cover any surprises on tax day.
The information in this article is accurate as of the date of publishing.
Sage Singleton Evans contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of December 1, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
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5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.