The Washington state Guaranteed Education Tuition (GET) program has set its unit price for 2012-13 at $172. The increase from last year’s $163 unit price is surprisingly low – 5.5%. This comes after a 39.3% increase for 2011-12. Over the first 11 years of the GET program, the unit price climbed from $35 to $76 – a 117% increase (10.65% average annual climb). But since reaching $76 per unit for 2008-09, the unit price has grown 126% in five years (25.2% per year).
GET is a prepaid tuition program that is guaranteed to keep up with the increase in tuition at Washington state colleges. Since the state legislature allowed colleges freedom in setting their own tuition, the costs have climbed quickly and the GET program has had to adjust its unit price to try to keep up.
“The trend in our state is toward much greater tuition increases than we have seen in the past,” said GET Director Betty Lochner in the press release announcing the 2012-13 unit price. “It’s a top priority to keep GET affordable for families, but it’s also a priority to ensure the long-term stability of the GET program.”
Stability of the program relies more on continual supply of new participants each year than it does on investment gains. As long as more participants open accounts or add to existing accounts, the program expects to cover its future obligations. If participation declines significantly in the future, however, the program could be challenged to meet its obligations based on investment returns alone.
New participants pay a significant premium for their units. While new units in 2012 cost $172, the payout value for participants redeeming units during the 2012-13 school year is $117.82. Therefore, if you buy 100 units (equal to one year of full-time state university tuition), you pay $17,200 for tuition credit that is worth $11,782 today. Because of the large premium over today’s actual cost of tuition, participants should plan to purchase units several years before they are redeemed. Participants who purchased units for young children before the large price increase of the past five years, have received an excellent return on their money.
According to the GET program, more than 25,000 students have used their accounts at colleges in all 50 states and five foreign countries. Since the program began in 1998, Washington families have opened over 144,000 accounts worth $2+ billion.
The rapid rise of tuition costs, combined with difficult investment markets over the past decade, has created challenges for GET to remain solvent. According to this article in the Seattle Times on June 28, 2012, state actuary Troy Dempsey said that about $19 of every GET unit purchased for $163 during the 2011-12 enrollment period was used toward a recovery plan to make the fund solvent.
Dempsey suggested that the likelihood that GET would require a bailout of funds from the state legislature over the next 50 years is just 2.4%. The pool of dollars currently available to be redeemed by GET participants is $2.3 billion. The value of all units sold is $2.8 billion. Theoretically, if everyone cashed in their tuition credits at once, the state would be obligated to make up the shortfall of $527 million, Dempsey said.
While GET participation has generated great tuition inflation protection for those who have been in the program since before 2008, it’s hard to know exactly what to expect for those who have started more recently at much higher cost.
A few things to keep in mind:
- 100 GET units are equivalent to one year of tuition expenses at the most expensive state school (although they can be used at any accredited institution of higher learning). Extra school fees for particular majors — a difference that may grow greatly due to new legislation — are not included in this amount.
- The units are only intended to offset tuition costs, not room-and-board or the full cost of college. You will have to consider other options (savings, loans, grants/scholarships, part-time work) to pay for the rest of your college experience.
- Buying GET units in lump sums is more cost efficient than buying through a monthly payment plan which levies a 7.5% finance charge or “load” on each new purchase.
- Due to the premium of today’s unit value over today’s payout value. It may not make sense to buy units after a child is older than about 12, especially if monthly payments are being made.
- Regardless of the type of college savings you intend to use, parents should make sure that they are fully funding their retirement first. There are no scholarships or loans to fund retirement if you happen to be short because you paid for your child’s college.
~ Gary Brooks, CFP® — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA