 Advertisement
|
Education Bond Program
The Education Bond Program makes the interest on certain savings bonds
tax free when the bonds are redeemed to pay qualified higher education
expenses or to roll over into a section 529 plan.
Eligible bonds include Series EE Bonds issued
after December 31, 1989 and all Series I Bonds. Series HH bonds are
not eligible. Bonds purchased before 1990 may not be exchanged for
bonds issued later to make them eligible.
The bond owner must be at least 24 years old on the bond issue date
(the first day of the
month in which the bonds were purchased). Parents can purchase
bonds for their children, but the bonds must be registered in the
parents' name. The child cannot be listed as a co-owner, but may be
listed as a beneficiary. You can also purchase bonds for your own
education, in which case the bonds must be registered in your
name.
Qualified expenses include tuition and required fees at Title IV
postsecondary educational institutions, including colleges,
universities and vocational schools. Room and board and books are not
included. Qualified expenses are reduced by the amount of any
financial aid received in the same tax year, including the amount of
other education tax breaks (Hope Scholarship, Lifetime Learning
Credit, scholarships, Coverdell withdrawals, section 529 plan
withdrawals, etc.). Qualified expenses do not include courses that
are not required as part of a degree or certificate-granting program.
The expense or
rollover must occur in the same tax year in which the bonds are redeemed.
The bond proceeds may be used for your own education, your spouse's
education, or the education of a dependent for whom you claim an
exemption on your income tax return. (Grandparents who own education
bonds can only claim an interest exclusion for their children or
grandchildren if the child or grandchild is a dependent listed as an
exemption on the grandparents' income tax return.)
Parents who are married must file a joint income tax return to
qualify for the interest tax exclusion.
Zero Coupon Bonds
Zero Coupon Bonds are fixed-rate,
fixed-return investment instruments. They are sold at a discount off
of the value at maturity, and are guaranteed to be redeemed for that
value if held until maturity.
US Treasury Zero Coupon Bonds are
known as
STRIPS,
which is an acronym for "Separate Trading of Registered Interest and
Principal of Securities".
The STRIPS program lets investors split Treasury notes and bonds into
their interest and principal components and trade them as separate
securities.
When a Treasury note or bond is stripped, each interest payment and
the principal payment becomes a separate zero-coupon security.
STRIPS are not issued or sold directly to investors. Instead,
investors may purchase them through financial institutions and
brokerages.
Warning about Marketable Bonds
Bonds that are sold on the open market, instead of being held until
maturity, may be vulnerable to principal risk. This is especially true
of longer-term bonds. Parents investing in bond funds or in mutual
funds that include bonds (e.g., balanced funds, 100% fixed income,
etc.) should carefully evaluate the average term of the bonds in the portfolio.
When interest rates go up, the value of a bond's principal goes
down. This is because one needs to invest less money to buy a bond
that generates the same amount of income. Certainly, if you hold the
bond until maturity, you will recover the full principal. But most
people who buy marketable bonds don't hold onto the bonds until
maturity, but buy and sell them on the open market. This means that
bonds are valued more for the income they produce than for their
underlying value at maturity. Of course, the closer a bond is to
maturity, the less impact changes in interest rates will have on its
value.
So if you buy marketable bonds in a low interest rate environment,
where interest rates are likely to increase, stick mainly to
short-term bonds. (On the other hand, if interest rates are likely to
drop, you can maximize your benefit by buying longer-term bonds.)
For More Information
For more information about using savings bonds as a college savings
vehicle, please see the US Treasury's
Saving Bonds for Education
web site.
Other bond-related US Treasury web pages include:
