Loans Student Loans Paying for College Can You Save for College With Savings Bonds? By Rebecca Lake Rebecca Lake Facebook Twitter Website Rebecca Lake has over a decade of experience researching and writing hundreds of articles on retirement, investing, budgeting, banking, loans, and more. She has been published by well-known finance brands including SoFi, Forbes, Chime, CreditCards.com, Investopedia, SmartAsset, Nerdwallet, Credit Sesame, LendingTree, and more. learn about our editorial policies Updated on May 19, 2022 Reviewed by Samantha Silberstein Reviewed by Samantha Silberstein Twitter Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California Life, Accident, and Health Insurance Licensed Agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies Share Tweet Pin Email Photo: Hero Images/Getty Images As a parent, helping to pay for your child's college education may be one of the largest financial investments you'll ever make. For the 2020-2021 academic year, the average annual tuition, fees, room and board, and other expenses for undergraduate students ranged from $18,830 at public, two-year colleges and universities to $55,800 at private universities. Meanwhile, most parents don't have much saved for their children's college. A 529 college savings plan can help you make up lost savings ground while enjoying some tax advantages. However, it's not the only way to save for future education expenses. One alternative is using a savings bond for college planning. Savings bonds can offer predictable interest rates and stability, but they may not be right for every parent's (or student's) financial needs. If you're considering savings bonds for college, take time to weigh the pros and cons. Benefits of Using Savings Bonds for College There are two types of savings bonds for college planning: Series EE and Series I bonds. Series EE bonds have a government-backed guarantee to double in value over their initial bond term. On the other hand, Series I bonds can offer a fixed rate of return that adjusts with inflation over time. In short, the key benefit of using bonds for college is that they're stable, safe, and you can gauge how much interest income they'll generate for college costs. When you invest money in mutual funds through a 529 plan, those funds become exposed to market risk. Thus, mutual funds have the potential to yield higher earnings, but there's a greater possibility that you could lose money compared to investing in government-backed bonds. Another advantage is that the earnings on bonds are usually tax-exempt if you're using them to pay for higher education expenses—a 529 plan would also offer tax-advantaged withdrawals. If you were to use mutual funds to generate money for college, any earnings would be subject to capital gains tax. If you planned for that and are financially able to deal with the taxes, then mutual funds can be a great way to fund your child's college expenses. If not, bonds and 529s with qualified education withdrawals won't increase the taxes you pay on the earnings. Note Bonds also offer flexibility since you can purchase multiple bonds in varying amounts with different maturity dates. By using maturity dates that expire progressively, you can create a customized bond ladder that can help you plan the timing for college-related, tax-advantaged withdrawals. Why Bonds May Not Be Ideal for College Planning While bonds can offer safety and security, they lack the earning potential of other investments, such as mutual funds or target-date funds that you could find in a 529 plan or Coverdell ESA. From November 2021 through April 2022, the composite yield for Series I bonds is 7.12%. That's a decent rate of return, but if you need the assets to be more liquid, you could park your money in an online savings account or certificate of deposit. A savings account or CD could be more accessible than a bond. With savings accounts, you can make up to six withdrawals per month without incurring a penalty. With CDs, you can choose between maturity terms ranging from one month to 10 years. If necessary, you can withdraw from a CD ahead of the maturity date; however, you'll pay an early withdrawal penalty for doing so. The tax benefits of savings bonds for college only extend so far, which is another downside to be aware of. If bonds are used for anything other than qualified education expenses, the interest earned would be taxable. The exclusion for tax on interest also phases out based on income, so if you're a higher earner, you may not realize any tax benefits by using savings bonds for college. Consider Every College Savings Option Savings bonds can be useful in planning for college expenses, but it may not be wise to put all your savings eggs in one basket. Instead, consider the other ways you have to save and pay for college expenses. Note Each method of saving for your child's college has benefits and drawbacks. It helps to weigh each one against your financial circumstances, and your child's as well, to see which one (or ones) might be best. That includes considering a combination of 529 plans, Coverdell accounts, online savings accounts, and CDs. While technically a retirement planning tool, a Roth IRA can also do double duty as a place to stash college savings on a tax-advantaged basis. As you compare different savings vehicles, consider whether there are any limits on how much you can save. For instance, a Coverdell ESA limits your contribution to $2,000 per year until your child turns 18. After that, no new contributions are allowed. A 529 plan, on the other hand, lets you contribute up to the annual gift tax exclusion limit each year. For 2021, that's $15,000 per child per parent. In 2022, the amount is being raised to $16,000. Also, consider the time frame you have for college planning. If your children are still infants, a savings bond with a longer maturity date could make sense. On the other hand, it wouldn't make much sense if the bond you bought for their education doesn't mature until after they've already enrolled in or graduated from college. Finally, consider the tax benefits and potential tax drawbacks of different savings options. If you take money from a 529 plan for anything other than qualified education expenses, that withdrawal would be fully taxable. With a Coverdell ESA, you're required to withdraw all the money by the child's 30th birthday. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. CollegeBoard. "Trends in College Pricing and Student Aid in 2021," Page 3. TreasuryDirect. "Series EE Savings Bonds." TreasuryDirect. "Series I Savings Bonds." U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Internal Revenue Service. "Mutual Funds (Costs, Distributions, etc.) 4." Treasury Direct. "Series I Savings Bonds Rates & Terms: Calculating Interest Rates." Internal Revenue Service. "Traditional and Roth IRAs." Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Internal Revenue Service. "Topic No. 310 Coverdell Education Savings Accounts."