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Son's bond matured: Reinvest, or pay loan?

AnonTXmomAnonTXmom Registered User Posts: 42 Junior Member
My son has a $10K bond which has just matured that was intended for his college use. He is in his third year of college, and has some outstanding loans ($4-5K) which he isn't required to pay on until he graduates. He will have earned $6,000-$7,000 this year in a federal work study job. Question: Should he reinvest the money from the bond, or pay off existing loans to reduce his assets?
Post edited by AnonTXmom on

Replies to: Son's bond matured: Reinvest, or pay loan?

  • emsibdnemsibdn Registered User Posts: 814 Member
    Wow, what's he doing that earns him $7k a year while in college? CIA? Haha, just kidding. Most people, at least Suze Orman, call undergraduate debt "good debt" because of the low interest rate, etc. Maybe the best solution is to save some of the money somewhere and then use some of the money to pay off the debt. Maybe like $2,500 towards the debt (if they allow payments before he graduates) and then save up the $7,500 somewhere else (another bond, market if you're into it, savings account) for emergency or something. By the way, what types of loans are they? Federal, bank/private? What is the interest rate?
  • BrandonBrandon Registered User Posts: 53 Junior Member
    You should contact the financial aid office of the school. There are more financing professionals there. You don't have to give your name or child's information. Just say that you have a general question that you want to be answered.
  • bluebayoubluebayou Registered User Posts: 25,542 Senior Member
    IMO, the only 'good' debt is a home mortgage. Unless the arbitrage on the school loan is less than the bond interest, I'd recommend paying off any credit cards first, and then the school loans.
  • sybbie719sybbie719 Super Moderator Posts: 22,196 Super Moderator
    Just my opinion ( I am not a financial person)

    Since the matured bond will be an asset in the student's name, the school will ask for him to contribute appros 35% ($3,500). Paying off his debt ($5,000 sudent loan) reduces the amount of this asset, now to 5,000, so if he still has to contribute 35% he will now only have to pay $1750 (while having done away with his debt).

    I agree with bluebayou, that he should pay down his debt then what ever he has left over he would pay the 35% toward his education.
  • jamimomjamimom Registered User Posts: 3,278 Senior Member
    The bond should have been reported as a student asset all along if it was in the student's name. The fact that it is now matured is not an issue--the market value each year should have shown up on the financial statement unless it is in an IRA or other qualified retirement vehicle. But sitting there on the asset statement another year does make it take another 35% hit, if he pays down the debt only the realized gain and earning from it are assessed.
  • AnonTXmomAnonTXmom Registered User Posts: 42 Junior Member
    Thank you all so much for your helpful comments. As to your question about work, I should have mentioned that he stayed and worked through the summer. We did tell the school about the bond before his Financial Aid was initially calculated, and have reminded them about it since. They have told us not to show it as an asset until its maturity, so here we are...Your suggestions about paying off the loan make sense, and I will pass them along to my son.
  • spn2200spn2200 Registered User Posts: 205 Junior Member
    First, is the loan subsidized or unsubsidized? If it is unsubsidized then I would pay off the loan only if the interest rate of the loan is higher than the interest you would earn on your $10000. If the loan is subsidized, do not pay off the loan because you are not accumulating any interest until your son graduates. In this case, reinvest the money. If you are concerned that it will reduce his financial aid, "gift" or "loan" the money to a sibbling or other family member, or set up some type of trust until he graduates.
  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    my daughter has an educational award received from her community service before college. She is opting not to cash it in until after graduation because we are afraid if she uses it to pay down loans finaid will assume we can take on more. ( These loans are subsidized, if they were not she would use it to pay them down)
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    See a knowledgeble AND Competent tax and financial people. The AND is very important. or carefully perform your own DO DILIGENCE.

    With that said. This is what we did ( I am a financial guy.) I assume we are talking EE US Treasury. Regardess of when bonds were purchased you may pay taxes. The bonds are tax exempt at the state level but taxable at the Federal level. If the bond is used for educational then the interest is Federal exempt. There are some ownership issues that must be met. see www.ustreas.gov

    To maximize use of the money from the bonds... Cash bonds in, be sure that you get a 1099int form from the bank showing the interest and bond numbers.
    Send the proceeds to your state's 529 as a ROLLOVER contribution (you can fill the form [1 page] out yourself and save 3% brokerage fee and be sure to read the fine print or contact the state's 529 adminstrator for your particular situation.) The administrators are very helpful.

    By putting the bond proceeds into a 529, you may deduct up to $2000 (depending on the state)of those proceeds from your gross state income taxes. Place the money in the least risk fund (money market). When the money shows up in the account, immediately request a withdrawal in your name, because, you want the tax benefit. Then take the money and pay kid's college expenses.

    Its pretty simple and a guaranteed high yield return with no risk.

    If you have problems, I have made similiar posts on CC recently and you can do a Search on my username. or reply to this thread.
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    Another alternative that we personally add into this question is to compare current and expected interest rate of student loans to interest rate of the bonds. Recommend that you down load "SavingsBond Wizard" from www. ustreas.gov, which will allow you to discover the current rate of your bond. You may discover, as we did, that the bonds are yielding a much higher rate than the interest rate of the student loans.
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