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Experts urge caution before investing in prepaid college tuition plans
As the gap widens between the value and the cost of the state's prepaid college-tuition program, GET, some financial advisers are urging families to invest with caution.
Seattle Times higher education reporter
Enrollment: New GET accounts must be established by May 31; once an account is established, GET units can be purchased at the current rate until June 30. Money withdrawn is not taxed, providing it's used for higher-education expenses. GET units now cost $163 apiece; a new price will be set in July, and those units will go on sale starting Nov. 1.
Cashing in: 100 units are worth a year of resident, undergraduate tuition and state-mandated fees at the highest-priced Washington public university. Right now, 100 units are valued at $10,223 for the current academic year. They can be applied to tuition and fees at nearly any college or university in the country, public or private.
Why the price is high: GET administrators say the purchase price is higher than the payout value because the state guarantees that the money invested in GET will keep pace with tuition in the future. The "premium" assures that the program will remain stable.
Timing: GET administrators recommend buying units at least four or five years before your child is expected to enter college for the investment to make financial sense; some financial advisers recommend starting even earlier. A family that bought GET units in spring 2006, when the units cost $66 apiece, would have cashed them in this academic year for $102.23 apiece.
Guarantee: Washington is one of five states that guarantees the value of the account.
As state universities prepare to raise tuition by double digits again this year, many families are looking to the state's prepaid college-tuition plan to blunt the impact.
But because tuition has gone up so dramatically in such a short period of time, the price of Guaranteed Education Tuition (GET) units has risen sharply, as well.
Financial experts say families should weigh the high price of GET units carefully against other college-tuition investments, because the gap between the value of the units and the cost to purchase them has grown. And some financial experts don't recommend GET at all.
The prepaid college-tuition plan typically sees most of its sales toward the end of May. The deadline to create a new account is May 31.
This year, the cost of a GET unit increased by more than at any time in the history of the 14-year-old program, jumping from $117 in 2010-11 to $163 this year. GET director Betty Lochner said the price was raised to build up reserves because GET is underfunded; if everyone tried to cash in at the same time, it would be able to pay out only about 83 percent of benefits.
Under the program, 100 units pay for the equivalent of a year's tuition and state-mandated fees at the state's most expensive institution.
Mark Kantrowitz, an expert on paying for college and the founder of the national financial-aid website FinAid.org, described GET and other prepaid college-tuition programs as "a great thing to have been in, before these increases occurred. But for new investors, I do not recommend them."
Lochner said GET is not subject to the ups and downs of the financial market and has been a safe, secure investment in the past.
"If you do the math, even with conservative numbers (for tuition increases) over a long period of years, you're going to save a ton of money on tuition," she said. "You're paying for the guarantee. It's a peace-of-mind program."
GET is underfunded because the value of its investments declined during the recession, much as many pension funds' values declined. Kantrowitz said that problem is not unique to Washington's plan; nationally, state college-tuition plans were only about 93 percent funded as of February.
At the same time, as state legislatures cut higher-education funding as a way to balance their budgets during the recession, publicly funded universities across the nation have been forced to raise tuition.
Last year, for example, the University of Washington raised tuition by 20 percent, and next month the Board of Regents is expected to raise it for the 2012-13 school year by another 16 percent, bringing the cost of in-state undergraduate tuition and fees to $12,385 a year.
Joe Hurley, founder of the national website Savingforcollege.com, said it's important for GET investors to understand that they're not locking in tuition at today's prices; they're buying tuition at a premium.
The state's GET administrators "are being very careful in setting a price to maintain the health of the overall fund," Hurley said. "That's required a substantial premium."
The current price of a GET unit is $163. The payout amount for the 2011-12 academic year is $102.23. In effect, the state is charging a premium of $60.77 over the payout amount, higher than it has charged in past years, said Robin Tan, a Kirkland certified financial planner.
If the UW does increase tuition by 16 percent, the GET payout next year would probably be about $120.
Tan said that if tuition went up an average of 10 percent a year, it would take six years to break even. "It really does not make sense for parents with children six or even seven years from college to buy the units," he said. "Better to invest or save elsewhere."
Lochner stressed that GET is a long-term investment designed for young families. In its marketing plan, it is "absolutely trying to target young families."
GET's financial health was last measured in June 2011.
At times in its history, it's been overfunded, and the 83 percent funding figure is just a snapshot of the value of the $2 billion fund compared with its payout obligations, Lochner said.
Since the program's last assessment, the stock market has risen in value, and GET administrators estimate it may now be funded at a rate of 85 or 90 percent.
She said GET units are selling more sluggishly this year than in past years. Although the program is on target to hit its goal of 10,000 new accounts, "we've really been struggling with getting word out that the benefit is still the same, and hasn't changed," she said.
She blamed the slow sales on a bill the Legislature debated that would have allowed universities to charge a higher tuition rate for some majors — more for engineering than for English, for example. That bill, which didn't pass, created confusion about the worth of GET units in the future, Lochner said.
Lochner said GET is a safe investment, and Hurley, of Savingforcollege.com, agreed. Washington is one of a handful of states that backs up the fund with a promise that the Legislature would make up the difference if there is a shortfall.
But Kantrowitz said he's not convinced prepaid savings plans are as safe as they've been billed. "It isn't entirely clear what the 'full faith and credit of the state' really means," he said. "If there's a funding shortfall, it's not entirely clear what would happen."
GET's future value depends on how much tuition goes up in the next couple of years. The state actuary has calculated the price of this year's GET units based on an average increase of 11 percent over the next 5 years, Lochner said.
Last week, during an interview with The Seattle Times Editorial Board, UW President Michael Young predicted this would be the last year the university would raise tuition by double digits; in 2013, tuition increases would likely be in the single digits.
Lochner said nobody knows what the future will bring. "We could have a double-dip recession that drives tuition back up to 20 percent," she said. With GET, "the risk is going to the state, not the person."
Katherine Long: 206-464-2219 or email@example.com. On Twitter @katherinelong.
Information in this article, originally published May 13, 2012, was corrected May 14, 2012. A previous version of this story incorrectly stated that the state actuary has calculated the price of this year's GET units based on an average increase of 11 percent over the next 15 years. The sentence should have said "over the next 5 years."