Saving for College with Series I Bonds

Saving for College with Series I Bonds

The Series I bond has gained significant popularity as an investment option over the past year, providing the security of a U.S. government bond with the added benefit of inflation protection, resulting in a current annual rate of 6.89 percent. It’s not surprising that many people are interested in it.

Considering the attractive yield, some investors may be curious about utilizing the Series I bond instead of a 529 account for college savings. However, there are pros and cons to this approach, and it’s essential to weigh them before deciding whether to use the Series I bond for college savings. This article will explore these factors and help you determine whether the Series I bond is a suitable choice for your college savings plan.

What is a Series I bond and how does it work?

A Series I bond earns interest in two ways: a fixed interest rate and a variable rate that adjusts to the level of inflation every six months. The variable rate adjusts higher or lower as inflation rises or falls, offsetting the impact of inflation and protecting your money’s purchasing power.

Currently, the Series I bond has an attractive yield of 6.89 percent, which is available for six months to anyone who buys it before April 2023. After that, the bond’s interest rate is adjusted and applies for the next six months, and this pattern continues for up to 30 years or until the bond is redeemed.

The bond has tax benefits, such as being exempt from state and local taxes. If the bond is used for qualified education expenses, the bondholder may also exclude the bond’s interest from their federal tax returns. Furthermore, the bond is one of the world’s most secure bonds because it is backed by the federal government.

However, the bond cannot be redeemed for the first 12 months after purchase, and if it is redeemed before five years, the bondholder forfeits the last three months of interest. In general, the annual purchase limit for Series I bonds is $10,000, but individuals can purchase an additional $5,000 using their tax refund. Some investors have found a workaround to buy an unlimited amount of Series I bonds, but they cannot be purchased within an IRA.

Using Series I bonds for college savings

Series I bonds may be an attractive option, at least while they’re yielding a high rate, for saving for college. The federal government allows qualified holders of Series I bonds – and Series EE bonds, too – to exclude from their income any interest paid when the bonds are cashed as long as the bond owner pays qualified education expenses at an eligible educational institution.

The rules for claiming the exclusion can be strict and the taxpayer looking to do so must meet all five of the following criteria:

  • You cashed Series I or Series EE bonds issued after 1989 in your name in the same tax year that you’re claiming the exclusion.
  • You paid qualified educational expenses in that same tax year for yourself, your spouse or dependents.
  • Your tax filing status is anything but married filing separately.
  • Your modified adjusted gross income is less than $98,000 if single, head of household or qualifying widower, or $124,800 if married filing jointly (in 2022). This number typically increases each year and IRS Form 8815 shows each year’s exclusion.
  • You were already age 24 or older before your savings bonds were issued.

The bonds must be in your name, or in your name and your spouse’s name if married. A bond purchased by a parent and issued in the name of a child under age 24 is not eligible to be excluded by either the parent or the child.

That’s a stringent list needed for the interest exclusion, and that’s on top of ensuring that your education expenses themselves are qualified. Such expenses include tuition, fees, student activity fees and related expenses required for enrollment at an eligible institution. The expenses must be for an academic period in that tax year or in the three months of the next tax year.

The pros and cons of the Series I bond for college savings

The interest exclusion can make Series I bonds more interesting as an option for those looking to pay for college expenses. Here are the other pros and cons of this approach:


  • Inflation protection: The Series I bond offers inflation protection, and that’s one of its biggest draws, ensuring that you aren’t losing purchasing power.
  • Safety: The bond is also great for its safety, and is backed by the U.S. federal government.
  • Current high yield: The Series I bond currently pays an attractive interest rate, despite its high level of safety.
  • Tax exclusion: Investors have the ability to exclude taxes on the bond’s interest if it’s used to pay for qualified educational expenses in the same year it’s cashed.
  • No taxes at state and local levels: Investors can avoid taxes on Series I bonds at the state and local levels, ensuring that all the bond’s interest goes to expenses.


  • No federal tax protection unless used for education: You’ll lose the federal tax exclusion of your Series I bonds if they’re not used for educational purposes. You may save for years and then realize you won’t use the bonds for educational expenses.
  • Yield may adjust lower: The Series I bonds offer a high yield now, but that yield can decline as inflation falls, and the Fed has been on a mission to stamp out inflation. For example, from April to October 2022 the Series I bond was paying 9.62 percent.
  • May not yield and compound well over time: A declining yield is almost certain to happen sooner or later considering that the Fed is raising interest rates, and today’s high yield may never return. Those investing in Series I bonds over the last decade, when inflation and interest rates were low, would likely be disappointed with the yields they received then.
  • Lower current yield than a well-diversified portfolio of stocks: Yields on Series I bonds are high now, but they’re still lower than the long-term return on the Standard & Poor’s 500 Index, a collection of hundreds of America’s top companies. Your investment could perform much better (but also much worse, to be fair) with stocks, and the best 529 plans offer a good selection of low-cost stock funds.
  • Taxable if transferred to a 529 plan: If you decide later that you want to move your I bonds to a 529 plan or another investment vehicle, you’ll pay taxes when you cash the bonds, taking out a potentially huge chunk of your money that could be compounding.

Bottom line

Series I bonds may make a compelling choice to pay for educational expenses this year or next, but the real test will come over time. For the Series I bond to remain a compelling investment for education, inflation will need to remain high, a situation that the Federal Reserve is actively combatting. So, while the Series I bond may remain attractive for the next few years, it’s unlikely to be a solid long-term solution for those looking to pay for the always-rising costs of college.

Leave a Comment