As a general rule, you have to pay taxes on the interest which you earn on your U.S. savings bonds. However, when your cash them under Education Savings Bond Program, it may be possible for you to exclude interest on them.

The Education Savings Bonds program of the Federal government allows you to claim a deduction for their part of or the entire amount you earn on saving bonds. The following requirements must be met in order to qualify

1. The bonds must be either Series EE/E or Series I bonds which are issued since 1990.
2. The expenses qualifying for higher education must be incurred in the year in which you redeem the bonds.
3. Your age must be at least 24 years on the first day of the month in which you purchase the bonds.
4. You can use the bonds either for your own education or for the education of your child. When you want the money to be used for the education of your child, the bonds have to be registered either in your name or in the name of your spouse. Your child, for whose educational expenses the bonds are purchased, may be listed as a beneficiary. However the child cannot be listed as a co-owner. 
5. If you are planning to use the money out of those bonds for your own education, the bonds have to be registered in your name.
6. You must file a joint return if you’re married, in order to get qualified for the exclusion.
7. There are certain income requirements for the eligibility. For the tax year 2008, the deduction is phased out on the basis of element there is a partial phase out if your income is more than $67,100 ($100,650 in case of people married filing jointly) and there is a total phase out if your income is more than $82100 ($130,650 in case of people married filing jointly).
8. The institution for your post-secondary education must be eligible for the program. Such institutions may be any college, any university or any vocational school eligible to participate in the stalled and Sega program which is administered by the U.S. Dept of education.
9. If you receive any scholarship, or any money under employer-paid assistance, or money under any other financial assistance, your eligible educational expenses must be reduced by that amount.
10. There are certain limitations on the purchase of these bonds.  You can buy these bonds up to $30,000 in a year.
11. You need not declare while purchasing the bonds that you will be using these bonds for educational expenses. Consequently, you may choose not to use these bonds for the education purposes at a later date.
12. Only the following educational expenses may qualify for this program – tuition and fees, expenses paid for any course required which is a part of a degree or certificate program, expenses for sports, games or hobbies if they are part of a degree or a certificate program. Remember, the cost of books or expenses on boarding are not eligible for exclusion under this program.
13. You cannot take advantage of the interest exclusion if you have acquired these bonds as a gift.

These bonds are available from payroll saving plans, from about 40,000 financial institutions nationwide, and TreasuryDirect. They are available in denominations from $50 onwards. Even though there is no limit on the amount of bonds you go on buying over your lifetime, there is a limit on the amount of purchase per year. You cannot buy EE bonds more than $5,000 and I bonds more than $5000 in a year.

Generally the educational institutions are not required to verify the expenses of the taxpayer claiming such exclusion. The taxpayer has to keep appropriate records to substantiate his/work claim.

You can use form 8815 for calculating the exclusion of interest from saving bonds. It is always advisable to purchase these bonds in smaller denominations. This provides a lot of convenience while cashing these bonds. In case of cashing more bonds than necessary to take care of the eligible expenses, the excess amount will be taxable.