Saving for College with U.S. Savings Bonds: Choosing Savings Bonds

Series EE Savings Bonds

Series EE savings bonds are your old-fashioned, garden-variety sort of savings bond, the kind your grandmother used to give you for high school graduation or your wedding. If you meet all the requirements, you may redeem them to pay for some college expenses without paying any federal income tax. In addition, they have the following features:

• They're issued at 50 percent of their face value. This means that a $100 bond costs you $50 to purchase.
• They're offered in a variety of face amounts. They range in face value from $50 to $10,000.
• They're guaranteed to reach their face value within 20 years. But they'll continue to earn interest after they've reached that value until the bond is 30 years old.
• Their issue date is always the first of a month, no matter what day of the month you actually purchase the bond.
• Interest is compounded semiannually and is paid only when the bond is redeemed. Interest rates are announced every May 1 and November 1 for the following 6-month period.
• You may cash the bond at any time, provided it is at least 6 months after the issue date for a bond issued prior to February 1, 2003, or 12 months after the issue date for a bond issued after that date. If you cash a bond that you purchased after April 30, 1997, that you've owned for less then 5 years, you'll also forfeit 3 months' worth of interest. For example, if you hold a bond for 2 years and then cash it in, you'll only receive interest for 21 months.
• You may exchange a Series EE bond for a Series HH bond at any time. You can defer the income tax on the accumulated interest in the EE until the HH reaches maturity. This can extend your tax deferral up to 20 years.
• You may not purchase more than $30,000 face value ($15,000 cash value) of Series EE bonds in any calendar year.

Not every Series EE bond is eligible for the educational expenses tax exemption. If you purchased any of these bonds before January 1, 1990, you have to pay tax on the interest even if you, and your expenses, are qualified in every other respect. Congress didn't grandfather older bonds when it enacted the new rules.

Series I Savings Bonds

Series I bonds are the new kid on the U.S. Treasury block, and they represent a major departure for the Treasury in that they offer you some inflation protection. Although Series EE bond interest rates are calculated using a fixed formula (the interest rate is adjusted every six months), the Series I bond interest rate is calculated to give you a fixed rate of return plus an inflation adjustment based on the Consumer Price Index.

Like Series EE bonds, Series I bonds may be used to pay some college fees if you can meet all the requirements. Although they're very similar to Series EE bonds in many ways, following the same rules regarding issue dates, how long you must hold a bond before you can cash it in, and how much interest you forfeit if you redeem a bond that you've owned for less than five years (three months), Series I savings bonds have the following differences:

• Series I savings bonds are offered at face value. You may purchase them in denominations ranging from $50 to $10,000, but you have to cough up the full face amount when you buy the bond.
• They have no guaranteed return. Because you already paid $100 for that $100 face bond, the government doesn't need to guarantee that you'll receive $100 when you redeem the bond. What you will receive on redemption, though, is your original $100 investment plus the interest on that $100, calculated monthly and compounded semiannually, making the value of your bond grow and grow.
• You may not purchase more than $30,000 face value ($30,000 cash value) of Series I bonds in any calendar year.
• The only thing you may exchange this bond for is cash. You can't turn it into a Series EE or a Series HH bond.