Can You Use Series EE Savings Bonds to Repay Student Loans?

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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?

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.

Can you use savings bonds for student loans?

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.

Do you have to pay taxes when cashing in savings bonds?

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.

How to use Series EE savings bonds for education tax-free

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.

Why you may want to keep those bonds 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. 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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Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% 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 July 31, 2020, and are subject to change based on market conditions and borrower eligibility.

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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.

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SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.28% APR (with AutoPay). Variable rates from 2.25% APR to 6.28% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

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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 September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.16% effective Sep 1, 2020 and may increase after consummation.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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