Series I and Series EE U.S. Savings Bonds
U.S. savings bonds can provide one of the simplest approaches to saving for college. Rather than setting up an account for your child under one of the many college savings plans (like a Section 529 Plans, Coverdell ESAs, or UTMA/UGMA Accounts), you can simply buy Series I and Series EE savings bonds. When you cash them in to pay for your child's college expenses, you will be able to do so without any earnings on those bonds being subject taxes.
Both Series I and Series EE bonds can be bought directly from the U.S. Treasury at TreasuryDirect.gov. Series EE bonds are purchased for half the monetary value they will be worth at the end of their maturity period. Series I bonds are bought in specific denominations, ranging from $50 to $10,000. Their value grows according to current interest rates. For both types of bonds, the annual rate of return is typically between four and six percent.
Bonds are a particularly safe investment. They offer a lower rate of return than other college savings options, but they are less risky. While there is a chance that the investments in a Section 529 plan could lose value, U.S. savings bonds are secure.
Furthermore, you can buy bonds for as little as $25. If your income varies or you are not in a position to make regular contributions to an educational savings account, purchasing bonds can be a practical option. You can make a purchase any time you choose, which can make saving for your child's education more convenient. Your earnings on each bond grow tax-deferred until you're ready to cash it in. There is an upper limit to the amount of bonds you can buy in any given year (you can purchase $30,000 worth of each Series I and Series EE savings bonds each year). The upper limit is high enough that it isn't a concern for most people; however, spouses can each purchase separately if they so choose.
Using Bonds for College Expenses
The interest earned on Series I and Series EE is fully exempt from both federal and state income taxes when you use it for qualified college expenses for your child, yourself, or your spouse, assuming that you qualify. Qualification is phased out for higher-income tax brackets: if you are single, your income must be under $78,100. If you are married, you and your spouse's combined earnings must be less than $124,700.
In order to cash bonds in for college expenses, you must apply your earnings from that bond to tuition. Unfortunately, the regulations setting out the qualified educational expenses for Series I and Series EE bonds are stricter than for other college saving vehicles.
As long as you own Series I and Series EE savings bonds, rather than your child, the bonds will have limited affect on your child's ability to qualify for financial aid. If, however, the bonds are also in your child's name, they will be considered student assets which can limit the amount of financial aid your child may be eligible for. Furthermore, the savings bonds cannot be solely in your child's name. They must be held in a parent's name in order to qualify for the exemption.
There are a few other rules that govern using savings bonds to pay for your child's tuition, although they are generally not an issue for most parents. You, as the purchaser, must be over the age of 24 when you purchase the bond. You must also hold the bond for at least six months between purchasing it and cashing it in. In comparison to other options for saving money for your child's college expenses, savings bonds are simple to cash in and use.