So you cash in the bonds and collect the interest. Then deposit the entire proceeds into a 529 plan.
The first problem is that contributions to a 529 plan are only tax deductible on state taxes in 33 states. Contributions to a 529 plan are not deductible on federal taxes. If you lived in a high tax state like NY (7%) you would normally pay 25% federal tax and 7% state tax on the EE interest. Cashing in the bonds and putting them in a 529 plan would save the 7% state tax but not the 25% federal tax.
The second problem is that for this to work, you have to live in the same state where the niece will go to college. Only 8 states allow you to deduct contributions to a different state's 529 plan.
It will work, but seems like a lot of effort for small benefit.
