Washington’s Guaranteed Education Tuition (GET) program has generated a bit of concern recently due to speculation that budget uncertainty might force the program to be ended.
While this is not a certainty, it does appear to be a growing likelihood. Other states have already closed similar programs to new participants. With tuition rates climbing swiftly, it has become very difficult for the state to earn investment returns at a level that keeps up with tuition increases. This is expected to become even more difficult as bonds (the preferred investment vehicle of most government programs like this) face a much more challenging environment over the next several years than they have over the past 30 years.
This may make the state’s obligations to manage GET very difficult to maintain from an investment perspective.
Current GET participants should not be too concerned, however, that their contributions will be lost or diluted in some way. Even if the accounts to fund GET obligations are not sufficient to meet redemption of GET units, the state is legally obligated to pay.
“The state guarantee is backed by the full faith and credit of the State of Washington,” GET materials indicate. “That means if future tuition increases ever require the program to pay out more money than it has available, the Legislature would be required by state law to provide funding to cover the shortfall.”
Even with faith in government budgets clearly shaken, it’s a strong guarantee.
OTHER GET DETAILS TO CONSIDER
GET is meant to be a fairly simple program but it has layers that are often misunderstood. Before making a new investment in GET units, consider a few important details:
1. You are not buying tomorrow’s tuition with today’s dollars.
This is a common misperception. The value of GET units is tied to the tuition rate at the University of Washington (UW), the most expensive public university in the state. Undergraduate tuition for in-state residents at UW for 2010-11 is $8,700. If you buy GET units during the 2010-11 offering period, which ends April 30. You pay $117 per unit. One hundred units is considered a year of full-time tuition. That means it would cost $11,700 in today’s dollars. That’s a significant premium.
Also, if the student attends a school with less expensive tuition, the payout value of your GET units is essentially reduced.
The state’s position is overlooked but clearly stated in GET materials: “The unit price contains a premium over current tuition so you should plan to hold your units for four to five years before use in order to realize financial gain.” In fact, you must hold GET units for at least two years before you can use them.
2. The premium you pay is the cost of the tuition inflation guarantee.
The state legislature allowed UW and Washington State University to increase its tuition by 14% for the 2009-10 and 2010-11 school years. Finding an investment with a guaranteed 14% return is not going to happen outside of Madoffland.
Now, there is consideration for allowing state universities to set their own tuition rates, breaking away from any standardization to address their own specific budget concerns. One proposal up for state legislature discussion would allow schools to raise tuition by no more than 14% in one year or a compounded rate of 10% over 15 years.
A 10% compounded growth rate means the cost doubles every 7.2 years. At that rate, today’s $8,700 tuition at UW would be closer to $27,000 in 15 years. It’s startling math considering that so many students and families already are overwhelmed with student loan debt.
3. If you intend to support your child/grandchild beyond just tuition, you will need to fund other costs with a different resource.
GET covers tuition and fees at the in-state resident level. You can apply the equivalent value to any accredited institution of higher learning, public or private, in any state, but the extra costs will not be covered by GET.
GET does allow you to purchase up to 500 units instead of just the 400 equated with the standard four years of tuition. So, if your student completes college in four years, the extra units and their value can be applied toward room and board or other qualified costs.
At some level, funding will likely be required beyond what can be saved for with GET. This is especially true if a private or out-of-state school is chosen, or if graduate school is expected. This is why some people with enough disposable income (or parent/grandparent gifts) participate in both GET and a standard 529 plan or Education Savings Account (ESA). Of course, if GET is frozen, the 529 or ESA will become the only tax-advantaged savings vehicles specifically designed to fund education.
4. Lump sums are the best way to buy GET units.
The best way to leverage the tuition guarantee is to buy units in lump sums while the student beneficiary is young. If you can participate in 10+ years of tuition inflation protection, the GET program has more value.
Beware that the periodic payment plans come with a 7.5% finance charge that effectively offsets much of the value. With payment plans, the state allows you to participate in a contract to buy a certain amount of units over time. You can lock in a lower unit price even if paying over several years. But the finance charge makes this route far less effective than buying lump sums, particularly if you can afford to purchase a single large lump sum very early in the student’s life.
There is not a tremendous risk in buying new GET units today, even if the program is ultimately closed. Buying a lump sum of units now at least guarantees that a portion of a child’s tuition expense will be covered. For many people, it’s a more comforting option than accepting the investment risk of trying to earn returns that outpace tuition inflation. This is your challenge with a 529 or ESA.
If you happen to be fortunate enough to consider funding college expenses for children or grandchildren as part of a broader estate plan, the best route to reduce your estate may be to maximize gifts into the 529 where contribution limits are much higher.
Certainly, many other details are involved in saving for and paying for college expenses. It helps to understand your options.
~ Brooks, Hughes & Jones — Partners in Wealth Management — Tacoma, WA
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GET unit price takes huge leap
As a follow-up to my September 8 column in The News Tribune (see below), here is some more detail about the new unit price to participate in Washington’s Guaranteed Education Tuition (GET) program.
The 2011-12 purchase price for one GET unit is $163. One hundred units is the equivalent of one year of tuition at a Washington state university (though the account value can be applied to any accredited institution of higher learning). I was conservative in the article suggesting that the new price would be north of $130, “possibly well beyond.” I didn’t want to present too shocking of a figure and have it turn out to be off base. I wouldn’t have been surprised by $150 but $163 is a big leap. Of course, the price is dictated by a massive spike in tuition rates at Washington state schools.
Considering that the payout value for participants redeeming their GET units this year is $102.23, the new purchase price includes a 59% premium over today’s tuition rate. And if you buy units with a periodic payment plan that includes a 7.5% program fee, the premium you pay goes up to 66.5% over today’s actual tuition cost.
If tuition costs advanced at 8% per year, catching up with a 60% premium would require six years before you broke even. Therefore, you wouldn’t want to invest after your child was 12 years old if you intended to start redeeming units at 18. If units will be used over four years, you could actually invest beyond 12 and still expect to catch up with the premium before the student graduated. Since Washington state school tuition inflation has been closer to 16% than 8% over the past three years, the breakeven period would come quicker, just a little over three years.
The GET unit price for the 2008-09 enrollment period was $76. In four years, the cost has gone up 114.5%. Over the six years previous to 2008-09, GET units increased in price by just 46.15%.
The biggest challenge to the state will be generating enough new interest in the program so that the funding model remains viable. Investment returns alone will not support continued elevated tuition inflation. Over time, more new participants may be required to provide cash flow for students currently redeeming their units.
If the high price of GET units leads to fewer participants, the programs sustainability will be challenged.
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Posted in Commentary, Financial planning
Tagged CFP, college, gary brooks, GET, inflation, savings, Tacoma, tuition