Why Savings Bonds Are a Great Way for Kids to Save for College

It’s almost a rite of passage to receive savings bonds as gifts when you’re a kid. While they’re still a popular gift for kids because of the lessons they can teach about interest, savings bonds are not exactly a profitable investment. Historically, the interest rates are so low that all of the profits are deleted by the effect of time and inflation. However, they are a safe investment, so if you’re worried about the volatility of your other investment products, savings bonds are one answer. Series I savings bonds offer inflation-adjusted rates to help offset some of the headaches of inflation.

Thanks to the education tax exclusion, the interest on savings bonds is tax exempt if the owner uses the money toward a qualifying college program. There are many other rules about registering the bond, and those with higher incomes may not qualify, but for most families, this is a great savings option for future college expenses.

There are other tax advantages, as well. You can postpone taxes on the interest until maturity if you wish to. And if you live in a state with high local or state taxes, you’ll be happy to know that savings bonds are exempt from both local and state taxation.

Kids do learn about the value of holding onto an investment with savings bonds, because you are penalized for cashing them in early. If your child misplaces a savings bond, it can be replaced through the Treasury Department.