What is 'Baccalaureate Bond'

A baccalaureate bond, also known as a state tuition bond, is a zero-coupon bond issued by certain states to assist families in saving for college tuition by means of a tax-free investment. A zero-coupon bond is a debt security that doesn't pay interest, also known as a coupon,  but is traded at a deep discount, generating profit at maturity when the bond is redeemed for its full face value.

BREAKING DOWN 'Baccalaureate Bond'

Baccalaureate bonds are tax-free securities that allow states to lend at reasonable rates, while issuing tax-free bullet bonds to residents who wish to save over time for post-secondary expenses, namely tuition. Bullet bonds are debt instrument whose entire face value is paid at once on the maturity date.

Baccalaureate bonds are typically issued in small denominations and are offered in several different maturities. These features make the bonds more convenient for investing and for paying annual college tuition bills. In some states, additional benefits such as tuition discounts may be included if the student enrolls in a state college using these bonds for payment. When combined with other tax-advantaged college savings tools, such as a 529 Savings Plan, baccalaureate bonds can be an efficient way of saving toward post-secondary education.

Like U.S. savings bonds, baccalaureate bonds are sold for less than their face value and are heavily discounted. They also earn a high level of interest, but they pay no interest until they reach their maturity date. Because most undergraduate programs are four years in length, it may be a good idea to stagger the maturities of baccalaureate bonds, so that the bonds will be maturing when the student needs the money most.

Baccalaureate Bond Features

Approximately 20 states still issue baccalaureate bonds. The bonds are usually available in cost increments between $1,000 and $5,000, and have maturities between five to 20 years. To qualify for these state-issued bonds, a student must be a resident of the state, and use the proceeds of the bond to pay for tuition at an in-state college or university.

Tax Benefits of Baccalaureate Bonds

The earnings on baccalaureate bonds accumulate free of state, local, and sometimes federal income tax, assuming you are a resident of the state and use the bonds to pay for tuition at a qualified in-state, post-secondary institution. Also, there are no limits on one’s adjusted gross income, or AGI, to qualify for the bonds. AGI is a measure of income calculated from your gross income and used to determine how much of your income is taxable. It is the starting point for calculating your tax bill and, among other things, is the basis for many deductions and credits.

  1. U.S. Savings Bonds

    A U.S. savings bond is a government bond that offers a fixed ...
  2. Term Bond

    Term bonds mature on a specific date in the future and the bond ...
  3. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  4. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  5. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
  6. Balloon Interest

    Balloon interest is an increased coupon rate on long-term maturity ...
Related Articles
  1. Investing

    Savings Bonds For Income And Safety

    Bonds offer undeniable benefits to investors, including safety and tax advantages.
  2. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  3. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  4. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  5. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  6. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  1. How does an investor make money on bonds?

    Bonds are part of fixed-income securities called debt obligations, meaning one party borrows from another party who expects ... Read Answer >>
  2. Why do interest rates have an inverse relationship with bond prices?

    At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
Trading Center