Paying college loans with savings bonds

Don TaylorQuestionDear Dr. Don,
If I cash in savings bonds to pay off college loans, will I have to pay a penalty?
-- Peter Penalty

AnswerDear Peter,
You're asking whether you can use savings bonds to pay off your college loans and have the interest earnings qualify for the education tax exclusion. You can't. There's no penalty, you'll just owe income tax on the deferred interest earnings.

There's also no interest penalty, unless you redeem a bond within the first five years of its issuance. In that situation, you lose the last three months' of interest earnings as an early redemption penalty. Savings bonds can't be redeemed in the first year of issuance, although the government makes an exception for disaster victims.

Beyond naming what qualifies as a higher-education expense, the education tax exclusion has income limitations and requirements as to how the savings bonds must be registered. You can learn more about it on the TreasuryDirect Web page, "Education Planning."

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation.  Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.  Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

News alert Create a news alert for "savings"


Show Bankrate's community sharing policy
          Connect with us

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Ask Dr. Don

Are my savings bonds safe?

Dear Dr. Don, I have approximately $20,000 in savings bonds. Given the state of the U.S. economy, should I cash them in? How safe are they if the economy tanks, the U.S. goes bankrupt or the country gets a serious credit... Read more

Partner Center

Connect with us