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Dumb parents' questions on education bonds & college fees
Old 01-26-2008, 03:59 PM   #1
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Dumb parents' questions on education bonds & college fees

Our kid's a high school sophomore and we're starting to liquidate her college for CDs or (*shudder*) a low-cost bond fund. She's applying to a variety of schools (with NROTC programs) and USNA. We have a handle on that process but I never attended a real college and I don't understand how the money changes hands.

A very small part of the college fund is paper EE bonds and an (electronic) I bond. The EE bonds were bought back in the early 1990s (before 529s, back when EE bonds were a good thing) and the I bond will hit its five-year anniversary in late 2010 (after she starts school). We've titled the bonds to make their earnings tax-free for educational purposes but a few things have changed over the last 15 years. We don't know where she's going yet but let's assume that the first year's tuition wipes out the entire bond inventory.

First, when do colleges want their money? (If we put funds in long-term CDs then we want them available before deadlines and without penalties.) Do they ask for money in Feb/Mar with the acceptance letter, in Jun/Jul with admissions paperwork, or (hopefully) later? When do we need to write a check, and when will it end for the freshman year?

Second, how do you redeem EE or I bonds for educational expenses? Do you just go through the same redemption process, get the money, send a check to the college, and declare the tax-free income on your 1040? Or do you have to engage in some sort of arm's-length transaction between the Treasury and the college-- like IRA rollovers-- to ensure that the money doesn't actually come under your control?

Third, when should the bonds be redeemed? I remember from waaaaaay back that there's a date of the month and of the six-month period that's considered best, but I don't remember the details. I believe it's as early as possible for both, correct?

Fourth, we could convert the EE bonds to electronic holdings or we could continue to hang onto the paper for another two years. Is there any benefit or pitfall to going either way?

Lemme know what else I'm missing...
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Old 01-26-2008, 04:25 PM   #2
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Colleges I've attended and the two my son has, all wanted their fees paid a semester at a time on or before the first day of class. For admission, they wanted a deposit within a few weeks of acceptance, but that was a small amount compared to tuition and room/board costs. I'm sure there's variations, so exact process likely depends on the school involved.
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Old 01-26-2008, 05:30 PM   #3
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College's do want the tuition a semester at a time during registration along with the fees. Never forget the fees they are a killer. Pay with a CC and then you have 30 days to cash a bond if needed.

The bonds as you know can be redeemed at your local bank. Just declare the interest as tax exempt when you do your taxes. There is a really good savings bond calculator that tracks the value of your bonds available here . The calculator will help you determine when to redeem a bond by telling you what it is currently paying in interest.
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Old 01-26-2008, 05:52 PM   #4
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First, when do colleges want their money?
Many (most?) Universities let you pay through TuitionPay (tuitionpay.com). This lets you pay monthly, broken up in 10 payments. There is a set up fee ($65 in 2005), but you easily save this in interest if the tuition amount is high. It's subsidized by the company using the opportunity to sell loans. We used this for the first two years. The first payment was due in July. Everything worked smoothly.

When we got a bigger scholarship for Junior Year, TuitionPay was no longer worthwhile, so we paid the bills when they came. The bill for fall semester was due in August, and the bill for spring semester in December.
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Old 01-26-2008, 06:00 PM   #5
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Nords, you will like this work sheet for figuring out the amount of tax exempt interest on the ee or i bonds. http://www.savingsbonds.com/forms/f8815.pdf

I helped some friends with it, turned out to be more complicated than we thought. Financial aid was assumed to go first for education expenses and then room and board but bond interest is not exempt for room and board. Or something like that.
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Old 01-26-2008, 06:08 PM   #6
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Is this about dumb parents, or dumb questions?

I believe I'm an expert at both...

IIRC, tuition is always due just before the start of the semester. I put my and DS's tuition payments on plastic... Good for airlines miles or Costco bucks!
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Old 01-26-2008, 08:23 PM   #7
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Is this about dumb parents, or dumb questions?

I believe I'm an expert at both...

IIRC, tuition is always due just before the start of the semester. I put my and DS's tuition payments on plastic... Good for airlines miles or Costco bucks!
Ditto to the plastic. Although the practice of allowing the card seems to be on the decline, my two kids were good for many, many points. I'll be driving GM cars for life.
DS undergrad was almost all plasticized, while now in med school we have only been able to charge goodies like health insurance, books, equipment and of course all the living expenses. Still no small amount.
Of course it takes planning and timing and it goes without saying around here---don't run a balance, and pray for graduation day...(May 08 yippee!
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Old 01-26-2008, 08:44 PM   #8
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Nords I just went through the EE savings bonds for tuition expenses last year. The college sends you and the IRA as form (1099 i think) that lists the total tuition expenses. The interest exemption which is based on the total value of the bonds cashed can not exceed the 1099 number.
Be careful there is also a phase amount based on your AGI (i.e. before you Schedule A deductions). It was rather low 75K IIRC and I had a partial phase out.

The bonds accrue interest every 6 months based on the issue/purchase date. I believe that is best to redeem right after they accrue interest so an Oct bond should be cashed Nov 1 or April 1. However that maybe an old urban myth they may continue accrue interest every day..

As far as cashing the paper bonds it is a real pain, first only banks cash them not credit union, or savings and loans. Unless you have an account none of the banks in Hawaii would cash more than $1000 (since all of my bonds were $500 variety that were now worth $1032) you could see the problem. I was force to open up a $300 Bank of Hawaii savings account to pay they uber high yield amount of %0.25 interest. In order to cash the bonds. I have to believ/ hope that the electronic ones are easier to deal with.
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Old 01-26-2008, 09:11 PM   #9
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For our sons the fall tuition was due August 2nd and the Spring tuition was due January 2nd. I pay with a credit card if there is a rebate although some colleges have started charging a fee for that so instead you can do an online payment from your bank account. The bill usually comes a month before the due date, so for Spring tuition due by Jan 2nd you could choose to pay it in December of the old year or January of the new year, depending on where you wanted the expense for tax purposes.

I assume you are familiar with the Hope Credit and the Lifetime Learning Credit. The Hope credit is for the first 2 years. After that you can claim the Lifetime Learning Credit, 20% of qualified educational expenses up to $10,000 for any remaining years. There are income limits on these. See IRS Form 8863.
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Old 01-26-2008, 10:04 PM   #10
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We pay monthly through TMS (tuition management services). There was a $60 set up fee and no other charges or interest.

The university contracts with them and they send a bill every month (a la mortgage) or you can set up transfers in various ways or use plastic.
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Education bond redemptions
Old 02-04-2010, 11:07 PM   #11
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Education bond redemptions

Two years later...

Believe it or not, with just 184 days before our kid starts college, we're seeking a 529 plan.

I thought I'd update this thread with a straightforward "cashed in our bonds" post, but holy crap this is getting complicated. It's nice to have this sort of asset problem, I suppose, but if I'd realized in 1992 what a redemption hassle EE bonds would be today then I'd never have bought them. I can see why TreasuryDirect has gone electronic.

In one of Peter Lynch's old books, he mentions that 1987's "Black Monday" made him glad he'd put his daughter's college funds in EE bonds. That diversification seemed like a good idea to us in 1992, before 529 plans and when dinosaurs roamed the earth. We DCA'd enough into paper EEs (remember "savings bond allotments"?) for a few semesters at a community college while the rest went into more aggressive equity funds. The equity plan succeeded beyond our wildest dreams (Tweedy, Browne Global Value & Berkshire Hathaway) and is now sitting in CDs. But we're going to use up the EE bonds first.

Our kid has nailed down an NROTC scholarship, which pays all $32K of Rice's tuition/fees and leaves us "only" the $11K for room/board. We don't know the details yet (For example, when does NROTC pay Rice? When do we pay Rice?) but we've been told that info is coming in June. I like the idea of paying our share through a credit card or a payment service.

Under certain requirements EE & I bonds can be redeemed tax-free for educational purposes, but that definition is limited to tuition & fees. Since NROTC is hypothetically covering those categories, we can't. However savings bonds can also be rolled over tax-free to a 529 plan, which can then be withdrawn tax-free for other college expenses like room & board. So our EE tax-exempt laundry requires redeeming the bonds, rolling them over to a 529, and then withdrawing them from the 529 to pay room & board. We meet all the other conditions for redeeming education bonds and there don't appear to be any time limits or other constraints.

Redemption looked like a huge hassle at first. As Clif pointed out, even if we had an account at a local bank they really wanted nothing to do with us. Our 1993-1996 EE bonds earn interest every six months so we expected to redeem them in several monthly installments over a couple years, but each bank (and even NFCU) kept throwing up administrative roadblocks-- must have an account for three months, $1000/day limit, 25 bonds at a time, and so on. Eventually we stumbled across TreasuryDirect's electronic conversion program. It took a couple hours to type 90 EE bond numbers into their database but we mailed them off today. The conversion takes about three weeks so we should be able to start redeeming by March and funding a 529.

The next challenge is finding a 529 plan that offers (1) rock-bottom fees and (2) an asset choice of cash, money markets, or CDs of two years or less. We don't need any Hawaii state tax credits so we're open to any 529 plan. Does anyone know of a website or a program that'll help us screen 529 plans for those features? It'd be an unexpected bonus if they're with Fidelity, where we have most of our ER portfolio, but we'd be willing to work with just about any low-cost fund company.
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Old 02-04-2010, 11:55 PM   #12
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I would call Fidelity. If they have a 529 and an office in HNL make an appointment and bring in those bonds.
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Old 02-05-2010, 11:42 AM   #13
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Under certain requirements EE & I bonds can be redeemed tax-free for educational purposes, but that definition is limited to tuition & fees. ... However savings bonds can also be rolled over tax-free to a 529 plan, which can then be withdrawn tax-free for other college expenses like room & board.

Wow, that's a nice little loophole I was unaware of. Thanks for that.
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Old 02-05-2010, 01:55 PM   #14
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We have used both the Utah and the Ohio 529 plans. The Utah plan recently changed to be even lower fee and allow more "roll your own" portfolios. The Ohio plan has always offered CDs as well as Vanguard income funds.

Another plan with a low-fee reputation is Illinois. These plans change every few months, so many web sites writing about which 529 plan to choose are out of date. There are other low-fee plans out there.
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Old 02-05-2010, 03:29 PM   #15
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I have money in the Ohio 529 for my kids (funds thru bank, vanguard and one other provider). If you use the Ohio plan and have problems, please tell me.
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Old 02-05-2010, 04:58 PM   #16
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Not all schools are the same. My son's tuition bill was due about a month before classes started. Some schools also charge a fee for using credit cards (through a service). If you opt for the pay over the year plan, your first payment can begin in the June/July time period.
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Old 02-05-2010, 06:33 PM   #17
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+1 for Utah Educational Savings Plan...they usually come out as one of the top 1 or 2 plans in the Morningstar rating every year for non-brokerage sold 529 plans.
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Old 02-05-2010, 09:06 PM   #18
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+1 for Ohio. Good selection of low fee mutual funds and painless withdrawals (send in a form by mail and cash shows up directly in the checking account a week or so later).

I also had a 529 account at Fidelity, which I believe is affiliated with New Hampshire. I have nothing bad to say about Fido's plans - just about everything about them was middle-of-the-road. There was convenience in getting the statements consolidated with an IRA I had there.

Back when I was shopping for another 529 home, I spent time at savingsforcollege.com looking through all the nitty gritty data on the various plans.

But for an informed shopper not worried about state tax deductions during the accumulation phase, I would just say to read through the April 2009 Morningstar annual ratings discussion and pick one of the plans that is highly rated and has the type of fund or CD you want.

Their top four:

Ohio CollegeAdvantage
Ohio Tuition Trust Authority
Indiana CollegeChoice 529 Direct Savings Plan
Upromise Investments
Utah Educational Savings Plan Trust
UESP Trust
Virginia Education Savings Trust
Virginia College Savings Plan Board
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Old 02-14-2010, 09:20 AM   #19
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Back when I was shopping for another 529 home, I spent time at savingsforcollege.com looking through all the nitty gritty data on the various plans.
Great website, Harry, thanks. I was able to sort through expense ratios and pick six or seven good state plans with money markets/CDs.

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I also had a 529 account at Fidelity, which I believe is affiliated with New Hampshire. I have nothing bad to say about Fido's plans - just about everything about them was middle-of-the-road. There was convenience in getting the statements consolidated with an IRA I had there.
The money market funds don't have much of a spread in performance, so we decided to go with Fidelity. Fidelity's website has a pretty good guide to 529s, with detailed plans for AZ, CA, DE, MA, and NH: http://personal.fidelity.com/planning/pdf/6167aagt.pdf

Fidelity's state plans seem pretty much the same funds with slightly different expense ratios. We're going to roll over the education bonds to that same New Hampshire UNIQUE. We'll pay a max of roughly $60/year to launder $10K (e.g., ~$5K of cap gains). In reality the money's only going to sit there for a few months, so it'll be minimal expenses.

The PDF is a good summary of the IRS tax pub, including details of what expenses a 529 plan can be used for and how it's affected by other types of credits. The PDF also covers rolling over education savings bonds, 529 accounts, and other types of savings plans.
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Old 02-14-2010, 12:45 PM   #20
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I had a AFROTC scholarship in my first year and they are excellent. I'm not sure when they pay the university, but I'm 99.9% sure you won't have any problems there...what will likely happen is that the ROTC folks will take care of paying their part and the college will simply bill you for the rest. That's how it worked for me, anyway. I think I even got a $100 per month stipend from the USAF folks -- for haircuts, I think.

It's probably too late, but the Idaho 529 plan (www.idsaves.org) has a stable value type fund and is run by Vanguard.

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