Are College Savings Bonds a Smart Investment?

For decades, families have been using college savings bonds as a low-risk, long-range savings option to prepare financially for their children’s college education. However, a lot has changed over the years, and parents now have many options to save for their children’s educations.

So, many parents wonder whether savings bonds are still the best option for your college savings plan in 2022? First, let’s look at the different types of bonds.

What Are the Types of Savings Bonds?

The U.S. Department of Treasury currently offers two forms of bonds, Series EE and Series I savings bonds. Series I bonds are offered in paper form, but Series EE bonds are only offered electronically.

Series EE Bonds

Series EE savings bonds are the more common of the two savings bonds. Those issued on and after May 2005 earn a modest fixed rate of interest and mature in 30 years. However, if you hold onto the bond for at least 20 years, it’s guaranteed to at least double in value, regardless of the interest rate. So, if you buy a Series EE bond for $7,000 today, that bond is guaranteed to be worth at least $14,000 in 20 years! If you cash in the bond and use the money for higher education expenses, you won’t have to pay taxes on the interest.

Series I Bonds

Series I bonds are similar to Series EE bonds and can be used tax-free to pay for higher education expenses. Series I bonds carry a fixed interest rate, plus and additional inflation adjuster. The numbers can get complicated, so you’ll want to consult a financial advisor to determine what’s best for your financial needs.

For Series EE and I bonds, you’ll need to own the bond for at least one year before you can redeem it. And if you cash in a bond before the end of a five-year holding period, you'll lose the last three months of interest.

Are There Limitations to Savings Bonds?

Savings bonds are backed by the federal government and are considered a very low-risk investment. But while you won’t lose money on a savings bond, you probably won’t make a lot either because they generally offer very low rates of return.

As we mentioned above, you don’t have to pay taxes on savings bonds when you use the funds to pay for higher education expenses, such as college tuition, room and board, and books. However, you will have to pay taxes on the interest if you want to use the bonds for K–12 tuition.

For these reasons, some parents choose other education savings options that offer higher rates of return and can be used for more types of qualified education expenses.

Are There Alternatives to Using Savings Bonds for Education?

Buying bonds is just one tax-smart way to plan for your child’s education. However, if you’re looking for one of the best plans for college savings that also includes K–12 tuition as a qualified education expense, you may want to consider the NC 529 Plan. That’s right, an NC 529 Account also allows you to use the money for K–12 tuition and still avoid paying taxes on the interest. NC 529 withdrawals can also be used for other qualified education expenses, including approved apprenticeship programs, student loan payments, a computer, and more.

NC 529 is popular with parents because it has a mix of conservative and aggressive investment options, which appeal to every level of investor. And if you already have savings bonds, you can roll them over to your child’s NC 529 Account by completing a simple rollover form that’s available on our website.

The contribution limits for NC 529 Accounts are also higher than those of college savings bonds. If you want to make a larger contribution to jump-start the account, one donor can contribute up to $16,000 a year to each NC 529 Account without triggering the gift tax. Married couples can likewise contribute $32,000 annually.

If you’re ready to start saving with NC 529, the enrollment process takes just a few minutes and a minimum $25 contribution to start planning for your child’s future today.