Saving for College with U.S. Savings Bonds: Rating the Usefulness of Saving Bonds for You

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On their face, U.S. Series EE and Series I savings bonds may not seem the swiftest way to stash a substantial amount of money away for college. However, they have a lot of good points, especially for the small investor, including the following:

• Your money is safe with Uncle Sam. No ifs, ands, or buts about it — U.S. Treasury issues are the safest investment around. If you're worried about the ups and downs of the stock market or you just watched yet another bank close its doors, that safety may appeal to you.
• You may save in very small amounts. As in any investment scheme, you must pay a minimum amount to start playing. With U.S. Series EE savings bonds, that amount is a princely $25. If you're concerned about paying the rent but still want to be putting something aside, this may be just the ticket for you.
• You'll never pay any initiation or annual fees to maintain a savings bond account. Even if your bonds exist only on the records of the Bureau of Public Debt (which cuts down on the chances that you may lose the little slips of cardboard that pass for savings bonds these days), it doesn't charge you for the privilege of looking after your money.
• Interest rates are competitive and actually exceed most bank and money market interest rates, and you won't ever pay any state income tax on your interest. The interest rates for Series EE bonds are calculated at between 85 and 90 percent of the current five-year U.S. Treasury Note, depending on the issue date of the bond. For Series I bonds, the rate is calculated by adding a fixed rate of return to an inflation component that is calculated semi-annually.
• If your student ends up not going to college or another eligible school, you don't have to pay any penalty to get your money out. When you redeem your bonds, you'll pay the federal income tax on the interest, but you don't have a mandatory deadline for cashing in your bonds.

On the flip side (and there's always a flip side), you won't ever get rich putting all your money into U.S. Savings Bonds. The interest rates are very low and will probably stay that way for quite some time. To add to that, interest is compounded only semiannually, which further lowers your potential earnings. If you're looking to make a lot of money fast, Series EE and Series I savings bonds aren't for you.

If, however, you've started saving early and have another college savings plan in place, savings bonds are a great addition.