While all 50 states offer some type of 529 plan, only 18 states offer the prepaid tuition variety. Some of these prepaid tuition plans are now closed to new enrollment, but Washington’s Guaranteed Education Tuition (GET) plan is still available to Washington residents (and WA residents only). It is only one of five prepaid tuition plans in the country that is guaranteed by the full faith and credit of the state. The GET was created in 1998 and is Washington’s only 529 plan.
How GET works
In a nutshell, account owners can purchase up to a maximum of 500 GET “units” at a specified price and redeem those units for college expenses in the future. 100 units represent the cost of one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university (either the University of Washington or Washington State University). Individual units are worth 1/100th of that cost. For the 2011-2012 academic year, GET units paid out at a rate of $102.23 per unit. Account owners can use up to 125 units per year, plus any rollover units from a prior year, to pay the cost of qualified education expenses.
Buying units and the GET premium
It is critical to note that the current purchase price of GET units is not the same as the payout value. While GET units pay out at $102.23 for the 2011-2012 academic year, new units cost $163.00 to purchase (through June 30th, after which date the purchase price may be annually adjusted).
According to the GET website, the reason for this premium (the excess of the unit purchase price over the current payout value) is because the state guarantees the GET account will keep pace with tuition in the future, even if it doubles or triples in price, and this premium over current tuition ensures stability for the program. In examining the history of this premium, it is interesting to observe that it has been generally increasing each year, which suggests that finding the right balance has, and may continue to be, a difficult challenge for the price-setting committee.
It’s evident from the previous chart that the GET premium has ballooned in past few years. It begs the question, “Is GET still a good deal?”
The answer depends on how much time your child has before they start college and your expectation of tuition increases during that time.
According to the GET website, annual tuition increases in Washington state have averaged 12.03% over the past decade, with double-digit increases occurring over the past three years. At that rate, one would break even from paying the current GET premium in about 5 years. But how realistic is it to assume double-digit increases in tuition over the foreseeable future? Can families continue to afford college at that pace? If actual tuition increases turn out to be less than this average, the breakeven point will move out further. For example, if annual tuition increases average 6% in the future, it will take approximately 10 years to recover the premium.
In actuality, the breakeven point should be further out than the examples above because your money would earn some return if it was invested in something other than the GET plan. In other words, we should expect to have more than the original $163 purchase price in 5 or 10 years, and that would extend the breakeven period.
Other note-worthy observations
- There is a one-time setup fee of $50 per GET account, capped at $100 per family.
- The maximum number of units that can be purchased per student is 500 units. At the current purchase price of $163, this amounts to $81,500 of assets that can used to fund this 529 account. Many other 529 savings plans have contribution limits in excess of $300,000 per beneficiary, so using both types of plans can allow you to save more.
- Students attending a non-Washington college can also use GET units to pay for education expenses at the payout rate in effect at that time, subject to the same annual limitation of 125 units plus unused rollover units from prior years. Given the typically higher cost of out-of-state tuition, additional funds may be required to cover the full cost.
- The GET payout value is tied to the increase in tuition and state-mandated fees. If college costs rise but are not categorized specifically as tuition or state-mandated fees, we may see the GET payout value lag behind.
- Refunds of GET units not used for education are subject to additional program penalties as well as federal tax on the earnings. However, unused units can be transferred to other student beneficiaries.
With the cost of college continually rising, it’s reasonable for families to seek ways to hedge against this ever-increasing expense. The GET plan has offered decent protection, with units purchased as recently as 2010 having already broken even. There is no doubt that the early adopters of the GET plan have been rewarded handsomely, particularly when compared with an alternative investment in stocks and bonds over the past 10 years. However, I find it hard to believe that tuition will continue to increase at double-digits levels unchecked, and I don’t believe the below-average returns of the market over the past decade will persist indefinitely. I believe the GET can still add value for families with very young children, but the current large premium makes other 529 plans far more appealing.
If you missed Part I of this series, read it here.