Like most Americans, you probably got savings bonds as gifts from relatives when you were younger. Because they combine the security of a savings account with the tax-deferred income potential of a college savings program, they still make great vehicles for higher education investments. The savings bond program has endured some major changes over the past few years, however. Not only are bonds now offered electronically, they come in just two flavors: Series EE and Series I.
Before 2005, the biggest difference between Series EE and Series I savings bonds was the spread between their face value and their purchase price. The Treasury offered Series EE savings bonds at half their face value, in specific denominations. By guaranteeing that the bonds would mature at a minimum of full face value within 20 years, the Treasury assured generations of Americans that they could use savings bonds to budget for college expenses. With the government phasing out paper savings bonds by 2011, the Treasury now sells both Series EE and Series I savings bonds at present-day face value.
Interest and Earning Potential: Series I
Investors often prefer Series I savings bonds for their streamlined, predictable yield structure. Twice every year, the Treasury sets a fixed interest rate for all Series I bonds purchased during the following six months. Those bonds retain that interest rate until redemption. To guard against inflation, the Treasury also adds a variable interest rate tied to the Consumer Price Index. In rare periods of deflation, the variable rate stops at zero and never falls into the negative, preserving your earning potential.
Interest and Earning Potential: Series EE
The Treasury ties Series EE savings bonds to the five-year Treasury bond. Series EE savings bonds offering consumers an easy way to get 90 percent of the prevailing T-bond interest rate at far lower face values than typical institutional investments. From May 1997 to May 2005, the Series EE interest rate was adjusted twice per year. Now that the Treasury issues savings bonds electronically, an accounting system sets a new bond’s face value automatically at the time of issue. The new system allows for more flexibility during periods of interest-rate fluctuation.
Analyzing the Differences
Now that the Treasury has streamlined the purchasing and redemption processes for Series EE and Series I savings bonds, only slight differences separate the two investments. According to Idaho State University accounting professors Richard F. Boes and Mark Bezik, Series EE savings bonds offer a guaranteed 3.5 percent annual return over 20 years when allowed to mature to face value. Series I bonds offer an opportunity to grow interest faster than other guaranteed investments during typical economic cycles. Seeking advice from a qualified college savings planner or tax accountant can help you decide the right place to stash your extra cash.
Joe Taylor Jr. manages sales for a Fortune 500 company and writes about finance, culture, and design. He has worked as a journalist and producer since 1989. His work has appeared on CNBC, CNN, and NPR, where Elvis Costello once taught him how to brew perfect tea. He holds a Bachelor of Science from Ithaca College.