Is It Better To Use Savings Bonds For Tuition or Student Loans?

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Is It Better To Use Savings Bonds For Tuition or Student Loans?

By The BIDaWIZ Team on April 20th, 2012 at 3:00 pm

Students that are debating how to pay for their tuition and loans, have an important decision ahead of them. If they have Series EE US Savings Bonds, they need to decide if they should use their bonds for tuition or to pay off their student loans.

The Tax Benefit of Series EE US Savings Bonds
Qualified taxpayers that are at least 24 years old, can exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE Savings Bonds. However, the bond must be used for qualified educational expenses and issued after 1989 if not a Series I Bond.

Qualified expenses include tuition and fees but not room and board. Furthermore, the expenses must be paid for either yourself, spouse, or a dependent for whom you claim an exemption on your return. The tax break also phases out if your modified adjusted gross income (MAGI) is $86,100 or greater ($136,650 if married filing jointly or qualifying widow(er) with a dependent child). Those with the filing status of married filing separately do not qualify.

Should I apply the US Savings Bonds to tuition or loans?
This is a no brainer from a tax perspective. By applying the bonds to tuition, the interest is tax free when used to pay for qualified higher educational expenses. Student loans on the other hand, do not qualify as a qualified educational expense since it is a credit product. Thus, the interest will be taxable to the bondholder if used for student loans.

To claim the exclusion, report it on Form 8815 and specifically line 3 of Schedule B (Form 1040A or 1040) which should be attached to your tax return.

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