Buying U.S. Treasury Bonds for College Accounts

A Guide to the Safety, Interest Rates, and Tax Rules of U.S. Treasury Bonds

No other investment offers the promise of long-term safety and a competitive yield like the 30-Year U.S. Treasury Bond. These bonds (just like T-Bills and Notes, Savings Bonds, and GNMA's) are backed by the "full faith and credit" of the U.S. Treasury. In other words, the only way an investor who holds these bonds to maturity would not receive their semi-annual interest payments and eventual return of principal, is if the U.S. Treasury itself were to go bankrupt.

In addition to the safety offered by the 30-Year U.S. Treasury Bond (also known as the "long bond"), the interest earned by investors is exempt from state income tax. This can make the 30-Year Treasury Bond competitive with other higher-risk bond issues.

U.S. Treasury Bond Maturities

U.S. Treasury Bond Prices

In both of these cases, a $100 bond may sell for slightly more or less (known as a premium or discount) to adjust for interest rate changes at time of auction. Purchasers may also be required to pay "accrued interest" if they can expect to receive a full-interest payment for a period in which they only owned the bond for a portion of the time.

U.S. Treasury Bond Interest Rates

Most parents buying U.S. Treasury Bonds for college or other expenses will be buying them using a non-competitive bid. In other words, they're not buying a large enough amount to directly influence the pricing and yield of the bonds. Investors purchasing under a non-competitive bid have a rough idea of what their interest rates will be prior to purchasing the bond, though it usually fluctuates slightly.

Interest on U.S. Treasury Bonds is paid every six months and is typically deposited to an investor's TreasuryDirect or brokerage account.

Taxes on U.S. Treasury Bonds

Unlike U.S. Series I and EE Savings Bonds, there is no special tax treatment for 30-Year Treasury Bond interest or sales when done to help pay college tuition.

Buying U.S. Treasury Bonds

U.S. Treasury Bonds as a College Savings Strategy

While the higher rates of the 30-Year bond are attractive, it can come back to haunt parents who have to sell these bonds prior to their maturity date to pay tuition. Depending on the prevailing interest rates at the time of an early sale, a parent may actually have to sell their bond at a discount in order to attract a buyer.

Parents wanting to own government bonds for their children may be better served to look at Series EE or I Bonds, T-Bills, Treasury Notes, or even GNMA's.