Q: My daughter and a friend are both soon to have their first child.  I would like to give a gift which helps the child economically over their lifetime. I've heard that the I savings bond is a good way to pay for college, is this true, is it safe, are there any other advantages to this savings tool?

A: What a great idea. Yes, an I bond is an excellent, safe and even tax advantaged way to help someone pay for higher education.

I bonds are a relatively new type of savings bond issued by the US Treasury. I bonds are designed to guarantee a real rate of return. To do this, I bonds adjust their rate every 6 months to track changes in the level of inflation as measured by the CPI-U. Even in periods of deflation, I bonds protect your investment by never losing value. Since an I bond cannot lose value and is backed by the US government, they are frequently chosen by investors over corporate or municipal bonds, which could default or lose value. With I bonds, you are able to protect your investment against inflation with the security of savings bonds.

The rate of an I bond is based on two separate rates, one of which remains constant for the life of the bond, and another linked to changes in the CPI-U measurement. The rate of an I bond changes every 6 months based on the changes in inflation. The current rate for an I bond is 1.74% and will adjust again in November.

The Series I savings bond program offers substantial tax advantages if you use the interest income on your savings bonds to pay for qualified higher education expenses such as tuition. Basically, to the extent the accumulated interest is used to pay tuition of a family member, the earnings are tax free. Another tax advantage of an I savings bond is that the earnings accumulate tax-free until the time the bond is redeemed. For more about the tax treatment visit http://collegesavings.about.com/od/ussavingsbonds/ss/savingsbonds_3.htm

Series I savings bonds are purchased at face value and are available in multiple denominations starting at $25.00. I Bonds have a one year minimum hold time in which the bond cannot be redeemed. Additionally, bonds are subject to a 3 month interest penalty if the bond is redeemed within 5 years of the issue date. Similar to other US Treasury Bonds, I Bonds continue to earn interest for 30 years. After that time, the matured bond is worth the face value plus the interest collected over that time.

I savings bonds can be purchased from most banks and, while considered a rather conservative investment, do guarantee a specific return for planning purposes. The flexibility and ease in purchasing the bond makes an I savings bond an excellent safe college savings gift for birthdays, holidays and other milestone events.