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 Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020 and is subject to change.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
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 May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
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 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% 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 June 15, 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 6/15/2020. 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.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.2% effective May 10, 2020.