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 to avoid bigger student loans. Read on to find out how to use Series EE savings bonds for education tax-free, or how you can cash them in to pay your student loans.
What is a savings bond?
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 in 1935 after President Franklin D. Roosevelt signed a law authorizing the US Department of the Treasury to issue a new type of savings security: the savings bond.
The first savings bonds were issued to help fund the United States’ involvement in World War II, and were issued as “defensive bonds.” 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 very 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.
Series EE savings bonds are sold at face value and earn a little bit of interest each month. While the interest rate is low and set at the time the bond is issued, the bonds are virtually risk-free.
The Treasury guarantees that the bond’s value will double 20 years after issue, at which point the interest rate resets to current interest rates for another ten years. After 30 years, the bonds stop earning interest.
For example, if you pay $100 for a Series EE savings bond in 2016, it would be worth at least $200 in 2036. This is why they are so popular as a gift to young children from older relatives. If Mom and Dad keep the savings bonds safely tucked away until college, those savings bonds can cover a portion of the cost of education that is worth about double what was paid.
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 purchased through banks, but now they can only be purchased online through TreasuryDirect. Existing savings bonds can be redeemed through a bank or TreasuryDirect.
How to use Series EE savings bonds for education tax-free
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 for education.
Congress created the Education Savings Bond program starting in 1990. Now all savings bonds issued on or after January 1, 1990 can be redeemed for qualified education expenses tax-free!
What education expenses qualify
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 Stafford and Perkins loans, you are eligible to cash in your savings bonds tax-free. The Perkins Loan program was closed to new borrowers when it expired on Sept. 30, 2017.
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 extra-curricular 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 doubt on how to handle your taxes, contact a qualified tax expert.
Why you may want to keep those bond a while longer
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. Keep on earning that interest!
If you have college tuition and fees in your future, you can keep those bonds until you incur the qualified education expense and redeem the bonds in those years to keep your tax bill as low as possible.
If your bonds are more than 30 years old, you are typically best 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 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, you can cash in your savings bonds to help pay off your student loans.
Just remember that you’ll have to pay taxes on your bond’s interest, so put some cash aside to avoid surprises you can’t afford on tax day.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 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 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% 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 Month/Day/Year, 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 08/21/18. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 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.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|