College savings — which to use first?

Hi Terry, My son will begin college in the fall. I have accumulated approximately $40,000 in a combination of savings bonds and a youth investor fund. Now that i want to begin to pull out $10,000 a year, i’m not sure which i should take from first. Should i do a combination of both funds, or should i deplete one type of savings first before depleting the second type of savings? Any advice?

Terry Says:  A lot depends on whether he is applying for financial aid, and on your income level.  Let me explain.  If that “youth investor fund” was in his name, or in a custodial account with his name on it, then it will weigh 6x times more heavily against him in the financial aid formula (FAFSA and the Expected Family Contribution).  So you would spend all that money first, so that in later years he would qualify more easily for financial aid.

Second, if you bought the savings bonds in YOUR name, (not his name), cashing them in would be tax-free IF the money is used for college, and IF you fall under the income limit and IF the bonds were purchased after 1989. Here is the descripti0n of those income limits (from TreasuryDirect.gov) for 2012. ( The 2013 limits have not yet been posted, but will be only marginally higher as they are adjusted for inflation, which as been non-existent.)

For single taxpayers, the tax exclusion begins to be reduced with a $72,850 modified adjusted gross income and is eliminated for adjusted gross incomes of $87,850 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $109,250 modified adjusted gross income and is eliminated for adjusted gross incomes of $139,250 and above. Married couples must file jointly to be eligible for the exclusion.

One more thing to keep in mind.  Older savings bonds have high “floor” rates that make them more valuable in these low interest rate times.  So you want to cash them in last, using other funds first.

I hope this gives you a good start on the decision — but also check with your high school guidance officer about filing the FAFSA from for financial aid (see the column of last week on my website) and any other aid that might be available.  You’ve done a good job saving money, but $40,000 doesn’t go far these days for a 4 year college education!