U.S. Series EE savings bonds issued after 1989 or Series I saving bonds are another tax-advantaged way to save for college.
Advantages
Backed by the full faith and credit of the United States government, the interest from these bonds is tax-free if used for qualified higher education expenses. Also, interest on Series EE and I savings bonds is usually exempt from state and local taxes.
Disadvantages
The full interest exclusion is only available to couples who file joint tax returns and single filers. It is reduced once the taxpayer’s modified adjusted gross income exceeds specific limits in the years the bonds are redeemed. For example, in tax year 2010 the full interest exclusion is only available to couples filing jointly with modified adjusted gross income of less than $105,100, and for single filers with modified adjusted gross income of less than $70,100. The interest exclusion is phased out if your modified adjusted gross income is between $105,100 and $135,100 for joint filers, and between $70,100 and $85,100 for single taxpayers. You can learn more about the Educational Savings Bond Program in IRS Publication 970: Tax Benefits for Education.
The rules for using savings bonds for education can be complicated. To learn more about using savings bonds for educational expenses, you should read the Bureau of Public Debt’s information on education and savings bonds or you can call the Federal Reserve at (866) 388-1776. You can call the Bureau of Public Debt toll-free at (800) 487-2663 for information on the latest rates for Series EE and Series I savings bonds or at (800) 722-2678 to learn how to buy savings bonds directly from the federal government.