College Financing Basics
college
Education bond programs

Coverdell and 529 plans are good bets for some, but if you think your child may opt not to go to college -- or you just want more control over your investments -- you may want to consider education bonds.

EE bonds and Series I bonds are both part of the Education Bond Program created by the Treasury Department in 1990.

These are investments that may not make you rich, but that aren't risky.

A benefit of this program over the 529 plans is that with these investments you won't have to pay a penalty if you decide not to use them for your child's (or your own) education. But if you do use them to pay for school, you won't be required to pay federal income tax on the interest you earn. You can buy the bonds in denominations from $50 to $10,000.

At a glance
BondsCustodial accounts
  • EE or Series I
  • Least-risky investment
  • No penalty if not used for education
  • No tax on earnings used for education
  • Must meet income guidelines to get tax exclusion
  • Must be 24 years old to purchase bonds
  • Money can be used only for tuition and fees
  • Must use money in the year bonds are redeemed
  • Taxes due if you redeem more money than you spend
  • Uniform Transfer to Minors Act (UTMAs) and Uniform Gift to Minors Act (UGMAs) accounts
  • No limit on annual contributions
  • Up to $750 per year in tax-free earnings
  • Custodian controls investment
  • Asset of the minor; can affect financial-aid eligibility
  • Can't transfer money to another family member
  • Becomes asset of child at 18; doesn't have to use money for education

EE bonds earn 90 percent of the average yield of the five-year Treasury securities. Rates are adjusted twice a year. I bonds are inflation-indexed bonds with yields pegged to the inflation rate. You can learn more about these bonds online at Savingsbonds.gov.

The bonds come with their share of caveats, so be sure you meet the requirements before you make a purchase.

Income

To qualify for the tax exclusion, you must meet certain income guidelines when you redeem the bonds.

For the 2004 tax year, for example, a single taxpayer's modified adjusted gross income had to be less than $59,850 to take full advantage of the exclusion. The exclusion began to be reduced at that point, and was eliminated for adjusted gross incomes of $74,850 and above. For married taxpayers filing jointly, those two numbers were $89,750 and $119,750, respectively.

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