Paying for your child’s college education will be one of the greatest expenses a parent can have. It is good to start early when planning, but with the average cost of tuition, fees, room, and board and food going up, it is harder than ever to put money aside.

You also have to be proactive in your approach for savings because the costs associated with a college education are set to more than double by the time your child reaches college age. It doesn’t matter if your child will go to a state school or a private university, the costs will continue to go up.

One of the options available to you for saving your college funds is Savings Bonds. Below are some points we will discuss to help you decide whether saving bonds are right for you.

• What are Savings Bonds
• Types of Savings Bonds for College Planning
• Advantages of Using Savings Bonds for College
• Disadvantages of Using Savings Bonds for College
• How to get Savings Bonds
• When should you cash in a savings bond?
• Will you get Taxed on your saving Bonds?
• Other College Saving Option

What are Savings Bonds

United States savings bonds are debt securities issued by the United States Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the United States government.

Read Also: Should You Save Your Money, or Invest It?

The savings bonds are nonmarketable Treasury securities issued to the public, which means they cannot be traded on secondary markets or otherwise transferable. They are redeemable only by the original purchaser, or a beneficiary in case of death.

Types of Savings Bonds for College Planning

Series EE

The Series EE savings bond replaced the Series E bond in 1980. These bonds are sold at face value and are worth their full value upon redemption. These bonds offer a fixed rate of interest, which is paid at maturity or redemption.

Series I

The Series I savings bond was introduced in 1998. Like the Series EE bond, the Series I is sold at face value. These bonds offer a rate of interest adjusted for inflation, making the interest rate somewhat variable. If inflation increases, the interest rate on the savings bond will be adjusted upward. During periods of deflation, the bonds are guaranteed never to drop below 0.00%.

Advantages of Using Savings Bonds for College

Series EE bonds have a government-backed guarantee to double in value over their initial bond term. Series I bonds, on the other hand, can offer a fixed rate of return that adjusts with inflation over time.

In short, the key benefit of using bonds for college is that they’re stable, safe and you can gauge how much interest income they’ll generate for college costs. When you invest money in mutual funds through a 529 plan, by comparison, those funds are exposed to market risk. On one hand, mutual funds have the potential to yield higher earnings, but there’s a greater possibility that you could lose money compared to investing in bonds.

Another advantage is that the earnings on bonds are usually tax-exempt if you’re using them to pay for higher education expenses. A 529 plan would also offer tax-advantaged withdrawals but if you were tapping something like a taxable brokerage account to help pay for college, earnings would be subject to capital gains tax. In that respect, bonds have an edge, since qualified education withdrawals won’t increase your tax bill.

Bonds also offer flexibility, since you can purchase multiple bonds in varying amounts with different maturity dates. You can create a customized bond ladder, which can help make planning the timing for college-related withdrawals easier.

Disadvantages of Using Savings Bonds for College

While bonds can offer safety and security, they lack the earning potential of other investments, such as mutual funds or target-date funds that you could find in a 529 plan or Coverdell ESA. As of October 30, 2018, the yield for Series I bonds was 2.52 percent.

That’s a decent rate of return, but you could have comparable yield by parking your money in an online savings account or certificate of deposit. A savings account or CD could be more accessible than a bond. With savings accounts, you can make up to six withdrawals per month without incurring a penalty.

With CDs, you can choose between maturity terms ranging from one month to 10 years. If necessary, you can withdraw from a CD ahead of the maturity date; you’ll just pay an early withdrawal penalty for doing so.

The tax benefits of savings bonds for college only extend so far, which is another downside to be aware of. If bonds are used for anything other than qualified education expenses, the interest earned would be taxable. The exclusion for tax on interest also phases out based on income, so if you’re a higher earner you may not realize any tax benefit at all by using savings bonds for college.

How to get Savings Bonds

The only way to buy EE bonds is to buy them in electronic form in TreasuryDirect. They no longer issue EE bonds in paper form. As a TreasuryDirect account holder, you can purchase, manage, and redeem EE bonds directly from your web browser.

When should you cash in a savings bond?

You can cash in a savings bond once you’ve owned it for a minimum of one year. But if you want to avoid penalties, you’ll need to wait five years. Otherwise, you’ll lose the last three months of interest earned.

The longer you wait to cash in your savings bond, the more your money will grow. Savings bonds continue to grow in value until they reach maturity at 30 years. If your savings bond hasn’t reached its maturity date, you might want to avoid cashing it in unless you plan to invest the money in an account that earns higher interest.

If you want to know how your bond is growing, you can see the current value of your electronic savings bond by logging into TreasuryDirect. For paper bonds, use the U.S. Treasury’s online savings bond calculator.

Will you get Taxed on your saving Bonds?

Savings bonds are exempt from taxation by any State or political subdivision of a State, except for estate or inheritance taxes. Interest earnings are subject to Federal income tax.

Interest earnings may be excluded from Federal income tax when bonds are used to finance education (see education tax exclusions). Restrictions apply.

Read Also: What is The Normal Amount to Have for Retirement Savings?

Other College Saving Option

Savings bonds can be useful in planning for college expenses but it may not be wise to put all your savings eggs in one basket. Instead, consider the other ways you have to save and pay for college expenses.

That includes looking at 529 plans, Coverdell accounts, online savings accounts, and CDs. While technically a retirement planning tool, a Roth IRA can also do double duty as a place to stash college savings on a tax-advantaged basis.

As you compare different savings vehicles, consider whether there are any limits on how much you can save. With a Coverdell ESA, for example, you’re limited to contributing $2,000 per year until your child turns 18. After that, no new contributions are allowed. With a 529 plan, on the other hand, you could contribute up to the annual gift tax exclusion limit each year. For 2018, that’s $15,000 per child, per parent.

Consider your time frame for college planning. If your children are still infants, then a savings bond with a longer maturity date could make sense. On the other hand, if the bond won’t mature until after they’ve already enrolled in or graduated from college, it wouldn’t make much sense.

Finally, consider the tax benefits and potential tax drawbacks of different savings options. If you take money from a 529 plan for anything other than qualified education expenses, that withdrawal would be fully taxable. With a Coverdell ESA, you’re required to withdraw all the money by the child’s 30th birthday or face a steep tax penalty.