savings bonds saving for collegeWorried about saving for college? As high school seniors around the country graduate and begin moving on, it may be a good time for them to cash in some of those savings bonds that friends and family members have been giving them over the years. Even if the bonds haven’t fully matured yet, they may have accrued enough interest to make cashing them in now a worthwhile way for graduates to get extra money for textbooks and off-campus meals. Savings bonds can also help supplement a student loan.

Until this year, savings bonds hadn’t changed much over the 80-plus years they’ve been around. However, the federal government has stopped printing paper bonds and switched to an electronic format. Now grandma needs an account at treasurydirect.gov—the U.S. Department of the Treasury user website—and so does her recipient or the recipient’s parents for a child younger than 18.

You can also redeem electronic and paper bonds online after you set up an account, which will be linked to your checking or savings account. The money will appear in your bank accounts within one business day after redemption. Be careful—you must hold onto any savings bond for at least one year before cashing it in or you will lose money on the transaction.

Savings bonds earn interest for 30 years after their issue date. That means that if you can afford to wait, you should save them until they completely mature. Savings bonds are like good wine—they are typically better as they age. This also means you don’t want to forget your account’s password—it could be a long time before you cash in those bonds.

Understanding the different types of bonds when saving for college

There are two different types of bonds currently earning interest: the EE series and the I-bond.

  • The EE series is a predictable bet, but the interest rates tend to be lower than other bonds, says Lateefah Thompson, a spokeswoman for the Bureau of the Public Debt, the branch of the Department of the Treasury that oversees bonds. EE series bonds earn interest at a set rate over the life of the bond. The rate is set when the bond is issued and never changes.
  • The I bond is more popular and has the potential to earn more interest, Thompson says. The bond’s interest rate is tied to the rate of inflation; the interest rate changes every May and November and lasts for six months.

You can also use the Treasury’s online calculator to see a bond’s value by inserting the series, value, serial number, and issue date. If you have a choice, cash the bond that is earning the least amount of interest—you’ll lose out on less that way.

You can still cash paper bonds at the bank, but if you’re looking at cashing more than $1,000 in savings bonds, you will have to go to a bank or institution where you are a customer.

Finally, keep in mind that the interest earned on your savings bonds is subject to federal income tax. You don’t have to pay for it until you redeem your bonds or they have finally matured, but take this into consideration when tax time comes.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.