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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You Get What You Pay For … Financial Planning Edition
Wall Street Journal columnist Jason Zweig, one of our favorites in the personal finance space, wrote an article August 7 about a new service for delivering low-cost, yet “comprehensive” financial planning to the masses.
Certainly, there are millions of people who are not engaged with a professional advisor and could benefit from guidance regarding their money decisions.
But we wonder whether this new service from Veritat Advisors will demonstrate value given the exceptionally personal and specific questions that most people have about how to protect their risks and build financial security through a lifetime of events and decisions.
In Veritat’s advisory model, customers submit financial information and high-level goals to Veritat’s financial planning engine. A financial plan is produced and customers then meet with a Veritat advisor via video link on the internet.
The advisors then help customers work with other providers to open and manage investment accounts, purchase insurance and complete basic estate planning documents.
Veritat charges a monthly fee from $25-$40, in addition to the initial financial plan fee of $250. It’s a low cost for the basics of a fairly generic, but suitable plan and investment strategy.
Zweig writes that Veritat expects, given the leverage of automated systems, that a single advisor could work with 1,000 clients per year.
Let’s review some basic math about this workload. If the advisor works 50 weeks a year at 40 hours per week, that’s 2,000 working hours. If the advisor had incredible productivity and spent every minute of those hours actually working on a customer’s financial plan or reviewing it with them, the advisor could spend just two hours per year per client. Of course, it’s not possible to be that efficient. There are many other obligations over a year of work that require the time of any kind of employee. So, being generous, a customer’s financial plan and ongoing recommendations likely would get an hour and a half or less of a Veritat advisor’s time over the course of a year.
The upside of this is maybe more people will seek financial advice and be able to better manage their current budget, investments and basic financial decisions. This way, they’ll be better prepared for life’s transitions and retirement.
In our experience, however, providing real value in a financial planning and investment management relationship calls for a much more personal approach, not an “advisor” interpreting the results of a software program and recommending a model portfolio that is “suitable” for someone near the same age, with similar income, assets and tolerance for the ups and downs of investment markets.
Good financial advisors also add value for their clients by being available as often as is necessary to help them through the issues that they face—an important life transition or a question about financial options that they have.
The impact of a relationship with a qualified advisor, personally looking after your finances and how they relate to your goals, is worth far more than $40 a month. This is especially clear when considering that at a minimum, we expect to spend at least 20 hours per year on even the most simple relationship with a client.
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP®
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