How Savings Bonds Could Impact College Financial Aid Eligibility

U.S. savings bonds and notes come in several varieties and denominations. With regard to college funding, Financial Aid Officer (FAO)s view these as assets. Just as important is the FAO’s perception of the interest that accrues on your assets, Kalman Chaney, best selling author of “Paying for College Without Going Broke” says “nothing prompts a “validation” (financial aid jargon for an audit) faster than listing interest and dividend income without listing the assets it came from.”

This is not to say that interest is not good. Au contraire, do not stuff your money in the mattress. This interest is your only hope of keeping up with inflation and rapidly rising college costs.

So what is a parent to do? I always stress competent planning. When dealing with Series E and EE U.S. Savings Bonds, the investor has two options: he can report interest on the bond as its earned each year, or it can be reported in one lump sum the year he cashes the bond.

The second option allows the investor to hold the bond while accruing interest for years. He’ll never pay interest until the year he finally cashes in. In terms of college planning, that had better not be a base income year. That would definitely raise your EFC.

There are exceptions made for certain Series EE bonds bought after 1989. The government give tax breaks to low and middle income parents who purchased the bond specifically for college funding purposes. As of 2011 tax rates, this benefit applied fully to single parents making up to $71,000 and couples making up to $106,650; partially to any single parent making under $86,100 or couple making less than $136,650.

We still recommend that families cash these bonds after the student’s final base income year (after Jan 1 of the Junior year). Taxed or untaxed, the FAOs still consider the interest as income and assess it with the same methodology as your income.

Typically the investor has options to avoid cashing bonds in a base income year. E and EE bonds can sometimes be rolled over into H or HH bonds. No law says bonds must be cashed upon maturation. In many cases, the bond will be held and accrue interest beyond its face value.

In any case the scenario should be discussed with a qualified college funding counselor. Only professionals can assess holistically which move makes the most sense in any given situation.

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