Student loans and Savings Bond education deduction

I purchased Series EE US Saving Bonds for my daughter’s education, however, she used student loans to finance her college expenses. My daughter has already graduated and is working. Can she redeem these EE US Saving Bonds now and pay off part of her student loans? If so, can she avoid paying taxes on the bonds?

Tom’s response

Unfortunately, the Savings Bonds education deduction isn’t available for paying off student loans. You can certainly cash the bonds to pay off the loans, but you won’t get the income tax deduction.

If your daughter has recently consolidated her student loans, she may be paying a lower rate on the loans than the bonds are earning. You should check this.

Banking is based on nothing more spectacular than borrowing at a low interest rate and lending or investing at a higher interest rate.

If the interest rate on the loans is lower than the rate paid by the Savings Bonds, it doesn’t make financial sense to redeem the bonds to pay off the loans. If she keeps them both your daughter becomes her own banker!