July 8, 2014

Is the Washington State GET Pre-paid Tuition a Good Deal?

UPDATE :   Washington state passed a law that reduced tuition for their public universities.   This impacted how GET works and the program has made some changes to adapt.    Currently though they are freezing new enrollments for a period "up to two years".    See the GET site for more information.    Because of these changes the information in the article below is not currently accurate.

I've been working on a series of articles discussing the prepaid tuition programs offered by several states.  Today I'll take a closer look at Washington state's prepaid plan called GET.

How does the plan function?
Washington state's prepaid college tuition plan is called Guaranteed Education Tuition GET.   The basic deal is that you pay now to buy a "unit" of education and then when your child attends college they get 1 unit worth of tuition.   A unit is worth 1% of a full years tuition at the most expensive public school in Washington, (which is currently University of Washington).   100 units would equal a full year of tuition.   You can use the equivalent amount of money at any university in Washington or out of state.   Right now it costs $172 to buy a unit and the payout is $117.82.    So basically you pay $172 today to get the value of 1% of a years tuition at U. Washington (or cash equivalent at another school) when your kid hits college age.

Is there a good return on investment?
If your child is fairly young then the plan can be an OK investment.   It does greatly depend on how fast tuition goes up in the future.   If you expect tuition to go up 2-3% faster than  other investment returns then the plan would work out for you.   Say for example if you expect tuition to go up 7% annually then you'd have to get better than 4-5% returns on your own to beat the prepaid plan.  Beating 5% isn't hard but it takes some risky investments whereas the GET plan is guaranteed.     So in this measure its an OK investment.   Nothing great but OK.

If your child is in their teens then it is unlikely that the plan would pay off.   For example if your child was 17 years old you'd be paying $17,200 for one years worth of tuition which currently costs $11,782.   Unless you think that U. of Washington tuition will go up over 46% next year then this is not a good buy.   In fact its unlikely that a child within 4 or 5 years of college would benefit financially.
 Bottom line :  It may be an OK investment for young children but for older children it does not pay out well versus investing on your own. 

Are there any state tax benefits?
Washington state has no income tax and there are no state level tax benefits for the plan.   Investment growth is not taxed at the federal level.

Can you use the funds anywhere?
Yes the plan money us usable at other schools.   From the GET FAQs :
You can use your GET units at nearly any public or private college, university or vocational school in the United States and at selected colleges in other countries. A college is eligible if it participates in federal financial aid programs through the U.S. Department of Education. For a list of participating schools, visit the Free Application for Federal Student Aid (FAFSA) Web site.

Is there a state guarantee?
Yes the plan funds are guaranteed by Washington state law.

Is it financially solid?
Yes the funding level is currently very good.   The 2013 annual report for GET says that the actuarial report determined the program is 94% currently funded  and on track to be fully funded by 2018.

Summary:   The plan is in good financial shape and guaranteed by state law.  It may be a good idea if your child is young, but the return would be poor if your child is in their teens.

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