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Using I Bonds To Pay for Higher Education

Paying for a child’s education is a serious financial commitment for many families, especially those aiming to cover the costs of a private or high-priced public university.

While 529 plans are a popular tool for college savings, they’re not the only option. U.S. Series I savings bonds — commonly called I bonds — can also play an essential role in education funding, particularly for families who have already maximized other savings vehicles.

This article covers how I bonds work, how to use them for education expenses and what to consider before adding them to your portfolio.


How I Bonds Work

I bonds are U.S. government savings bonds designed to protect against inflation. The interest rate on these bonds has two parts:

1. A fixed rate set at purchase and lasting the life of the bond; and

2. A variable inflation rate adjusted every six months based on changes in the Consumer Price Index for all Urban Consumers (CPI-U).1

This structure allows I-bonds to preserve purchasing power over time, making them particularly appealing during inflationary periods or stagflation, when stocks might not do well.

There are a few rules to understand about I bonds:

  • Purchase limits. You can buy up to $10,000 in I bonds each calendar year electronically through TreasuryDirect.1 For married couples, this means up to $20,000 annually. Individuals used to be able to buy an additional $5,000 in I bonds each year with their tax refunds, but this option was no longer available as of January 1, 2025.2

  • Holding period. You must hold I bonds for at least one year before redeeming them.1 If you cash them in within the first five years, you forfeit the last three months of interest. After five years, there is no penalty.

  • Maturity. I bonds earn interest for up to 30 years, unless you redeem them earlier.1 That's potentially three decades of tax-deferred growth, if you choose to delay paying taxes on the interest until the bond matures. We'll explain that option in more detail in the next section.

Paying Taxes I Bonds

In general, interest on I bonds is exempt from state and local income taxes, but taxable on your federal income tax return.1 You can choose whether to pay federal income taxes annually or wait until you cash in the bond and report all earnings when you actually receive the money. Talk to your accountant or financial planner to see if taking interest annually each year would make sense for you.

One attractive feature of I bonds is the ability to avoid federal income tax on the interest if you use the proceeds for qualified higher education expenses. This is called the Education Savings Bond Program.3

To qualify for tax-free treatment, you must meet all the following conditions:

Because the exclusion is tied to income, many higher income families may not qualify. However, you may be able to take steps to lower your MAGI, like contributing more money to a workplace retirement plan, IRA, or health savings account (HSA).6

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One attractive feature of I-bonds is the ability to avoid federal income tax on the interest if you use the proceeds for higher education expenses.

Just be away that your MAGI is the adjusted gross income (AGI) shown on your tax return, plus a few items the IRS requires you to "add back" — and one of the required add backs is any excluded bond interest.

Check with your accountant if you're unsure, because even a small change in your MAGI can affect your eligibility.

Even if you don't qualify for the exclusion, the state tax exemption and inflation protection still make I bonds appealing as a supplemental savings tool.


Why Consider I Bonds Alongside a 529 Plan

Many families save for college with a 529 plan to take advantage of tax-free growth and tax-free withdrawals for qualified education expenses. But 529 plans have some limitations, so parents might want additional options.

Here are a few reasons you might consider I bonds as a complement to saving in a 529 plan:


Maxed-Out 529 Contributions

A 529 plan doesn’t have a fixed annual contribution limit. However, many high-net-worth families choose to stay within the annual gift tax exemption limit, which is $19,000 per recipient for 2025.7 Staying within the annual gift tax exemption limit means you don’t have to file a gift tax return to report the gift to the IRS, and the contributions won’t count toward your lifetime gift tax exemption.8

You can also superfund a 529 plan by contributing five times the annual gift tax exclusion and treating it as if you spread those contributions out over five years. In this case, you do need to file a gift tax return, but the contributions don’t count toward your lifetime exemption.9

For families who have already contributed the annual gift tax exclusion amount or superfunded a 529 plan, I bonds provide another tax-advantaged way to save.


Flexibility If College Isn’t the Right Path

If your child chooses not to pursue higher education or doesn’t need all the money you saved in a 529 plan, you have limited options for using the funds without paying taxes and potentially a 10% penalty for non-qualified use.10

However, you can redeem I bonds for any purpose. You’ll owe federal income tax on the interest if you don’t use the money for qualified education expenses, but no penalty applies as long as you’ve owned the bond for at least five years.


Inflation Protection for Late Savers

If you wait until your child is in high school to start saving for college, you don’t have a very long horizon to recover from potential market downturns. I bonds provide a low-risk, inflation-protected alternative for shorter-term savings.


State tax benefits

I bonds are always free from state and local income taxes, regardless of how you use the proceeds.


Less Impact on Financial Aid

Since I bonds are in a parent’s name, they don’t have as much impact on financial aid eligibility as assets in a student’s name when you file the Free Application for Federal Student Aid (FAFSA).

The FAFSA only considers up to 5.64% of a parent’s assets as available to pay for college, compared to 20% of the student’s assets.11

Funds in a 529 plan owned by a dependent student or one of their parents are also counted as parental assets on the FAFSA.11 For financial aid eligibility purposes, this distinction makes both 529 plans and I bonds more appealing options than saving for college in a savings account or UGMA/UTMA account in the child’s name.


A Flexible Supplement to Traditional College Savings

The income limits on the education tax exclusion may make saving for education with I bonds less appealing for high-net-worth families. However, the combination of inflation protection, state tax exemption and redemption flexibility makes them a helpful tool for diversifying education savings.

As with any financial decision, consider your overall portfolio, tax situation and long-term goals. A conversation with your financial advisor can help determine whether I bonds are a good addition to your family’s education funding plan.

Important disclosure information

Asset allocation and diversifications do not ensure against loss. This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. TreasuryDirect, “I bonds,” accessed December 8, 2025. Back
  2. TreasuryDirect, “Using Your Income Tax Refund to Buy Paper Savings Bonds,” accessed December 8, 2025. Back
  3. IRS.gov, “Publication 970,” published November 15, 2024. Accessed December 8, 2025. Back
  4. TreasuryDirect, “Using bonds for higher education,” accessed December 8, 2025. Back
  5. IRS.gov, “Rev. Proc. 2024-40,” published October 22, 2024. Accessed December 8, 2025. Back
  6. IRS.gov, "Lowering AGI this year can help taxpayers when they file next year," updated May 29, 2025. Accessed December 8, 2025. Back
  7. IRS.gov, “IRS releases tax inflation adjustments for tax year 2025,” updated May 29, 2025. Accessed December 8, 2025. Back
  8. IRS.gov, “Frequently asked questions on gift taxes,” updated October 29, 2024. Accessed December 8, 2025. Back
  9. Alexandra Demosthenes, “529 plans and education funding,” The Tax Adviser, published September 1, 2023. Accessed December 8, 2025. Back
  10. Isabel Engel, “4 ways to make the most of leftover 529 college savings account money, according to a financial advisor,” CNBC, published August 22, 2024. Accessed December 8, 2025. Back
  11. Kathryn Flynn, “How 6 Different Assets Can Affect Your FAFSA and Financial Aid Eligibility,” Saving for College, updated June 30, 2025. Accessed December 8, 2025. Back