Claudia Grisales
University of Texas
Daily Texan
(U-WIRE) AUSTIN - The federal government unveiled a new bond program last week for low- and middle-class families, which experts said is a better way to start saving more money and will help those who need money for college.
I-bonds, or inflation-indexed bonds, will be sold at face value in six denominations ranging from $50 to $5,000 beginning Sept. 1, 1998.
Lewis Spellman, University of Texas professor of finance, said the I-bonds allow investors to defer the tax on the bond to the time when interests are cashed - or avoid the tax altogether if they cash it for college costs.
The bonds can be redeemed after six months and can earn interest for as long as 30 years. Investors redeeming bonds before five years are assessed a three-month earnings penalty.
Dan Hamermesh, UT professor of economics, said this will protect smaller investors - whom the bonds will likely attract - and provide better investment accessibility for middle- and low-income families.
Henry Urick, assistant director of student financial services, said the popularity of programs such as prepaid tuition signals that the inflation-indexed bonds have great potential.
"Anything that will motivate parents or students to save will help in college costs," he said. "Families are always looking for ways to save money for college costs - the prepaid college program has been popular; this type could assist them."
Todd Morgan, executive director of the Texas Tomorrow Fund, a plan which allows parents to prepay their children's college tuition, said the new bonds could have an effect on his program but that he thinks it will be minimal.
"I think there will be a small effect," he said. "Families are running scared to get a grasp on costs they can't get a hold of - the inflation scares people."
Morgan said his program provides a different service, but he added that the savings bonds offer a good investment vehicle.
"We are offering a different product," he said. "We advocate a diversified portfolio. The treasury is helping people out who get a guaranteed return."
The bond earnings will reflect a combination of an inflation rate and a fixed rate set by the U.S. Secretary of the Treasury.
The fixed rate will apply for the life of the bond. The inflation rate is established based on the consumer price index for all urban consumers and is subject to change every six months.
Interest earned may be tax-exempt if used for college costs and if specific qualifications are met. Taxes on the bonds can be deferred until they are cashed or have matured.