US Savings Bonds

Question: Savings Bonds and college?

Hi, I bought some EE Savings Bonds meant for my kids’ college fund. They are under my name. I thought I can get tax-free interest when I apply them for college expenses. However, since my income exceeded the specified limit, there is no incentive for me to cash them out for education purposes.

So should I wait until my kids are out of college before cashing them out? So that their financial aids applications would not be adversely affected? Thanks for your help?

Answer: Yes, and your kids’ financial aid applications will be affected whether you keep the bonds or sell them.

A) Keep the bonds and hold them until your kids graduate from college. Put the interest income from the EE Savings Bonds into self-directed IRA’s in each child’s name. That way, the income from the bond interest can grow tax-deferred while your kids are in school. Once the kids graduate, the kids can cash out their IRA’s and use the money to pay for education expenses, and not get hit with taxes. Sell the bonds and, assuming you have them in a tax-deferred account, use the proceeds to pay your kids remaining school expenses.

B) If you claim your kids as dependents on your taxes, your kids’ financial aid package will be affected based on your income level, and investment assets. Sallie Mae takes this into consideration when processing student loan apps – the same information is used in determining financial aid (i.e., Pell grants, Stafford Loans, etc.) Talk to a financial aid counselor with your kids’ school – they should give you the lowdown on what’s considered when applying for financial aid.

Good luck….

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