I’ve been trying to read as much as I can about the WA GET Program versus 529 Plans. Thank you, Randall, for your really helpful post.

Moving forward, I still can’t determine what is the better option moving forward. I have three kids, 6, 3 and 2. They each have a little more than $5,000 in the Utah UESP 529 Plan. They also each have 25 units in the WA GET Program, at a price of $101 each. Is the GET just becoming a worse and worse deal, particularly given that tuition this year at the UW is $8,700/yr (or $87 per unit vs. $117 in the GET).

Reading this thread, Randall states that he no longer recommends the WA GET Program. Have others as a result, moved their college savings to 529s instead?

I’m really struggling with what a 529 will be worth in ~12-16 years versus the yearly rises in tuition. It seems to me that tuition is raising well in advance of inflation and the stock market, which would seem to make the GET a no-brainer, but then once the premium is added, I get all messed up (citing my $117 vs $87 example from above).

Like all of us here, I’m just trying to do what’s best for my kids, and I’m struggling with what to do. I’d really appreciate any additional insights Randall or others on this topic may have. Advice welcome!

Thanks, folks,
Roger

Thomas’ story is the main reason an individual should consider the GET. Paying for college education is likely the only significant investment that is specifically time based with a small window of redemption. The likelihood is that your child will, at the age 18, attend college and that will be a 4 year process. Can you predict (no you cannot) the state of the economy, therefore, the value of your investment, during that four year period?

Over the long term, a conventional 401/IRA or the like will probably outperform the GET. But, what will your IRA be valued at during that specific 4 year period when you need to cash it in. It is possible you could use your entire investment in the first year of school if the market performs like it actually did in 2008-2009.

This is not a recommendation for the GET, just don’t get caught up in future analysis using percentages that all suggest the Evil State has masterminded a plan to bilk poor hard working folks out of their child’s future.

It is all based on risk….therefore spread it around.

As I said above, I cannot recommend WA GET at $101/unit which is about a 30%+ premium over current tuition rates. I agree with rlucas’ analysis – the fixed guaranteed return is not high enough to outweigh the lack of flexibility in the investment. Regrettably most asset classes are now fully or over-valued, meaning there’s not a great alternative right now.

Were I starting from scratch, I would not invest anything in GET right now.

It sounds like you need a trusted financial advisor. I recommend trying to find a “fee only” guy whom you can pay by the hour to talk to and who will walk you through what you should do, but won’t sell you anything. That’s general advice, folks: never trust recommendations from a commission-based broker, and only use %-of-assets type advisors if you have a good reason to do so.

Also, it sounds like you need to spend a few hours reading up on 529 plans; some of your questions are quite basic and you can get them answered with some reading. Your intuition and suspicion about fees will serve you well. Good luck.

Good parts of your analysis:

- Purpose-matched investment that is “secure.” Meaning that, because it’s matched to a known future obligation, it removes some of the risk of not being able to meet that obligation. NOTE that the only reason you can say that while still recognizing that you might be getting a good deal (that is, outpacing the market) is the “full faith and credit” guarantee of the state. Anything below the state level is NOT something you can rely upon for a “good deal” (which invariably is a bad deal for the counterparty). Look up “Washington Public Power Supply System” for a fun read.

- Long, long horizon.

- Thinking about tax-free vs. taxable investing (though in fairness, in a self-directed 529, you should be able to get tax deferral benefits).

- Sunk cost mentality. You can’t invest at last year’s price, only at the current price, so don’t fret over whether it was better then.

Bad parts of your analysis:

- High tuition increase estimate. I know it doesn’t seem like much, but if you use 6.8% (or heck, 5.8%) instead of 7.8%, it’s a material difference in the final outcomes. I’d take the over on 7% over 17 years but just barely — you’ve got now state law capping tuition rises (meaning they’re going to game the system, creating a bunch of expenses for students but not calling it “tuition” — just you watch! — and thereby introducing risk of you having extra obligations to meet), you’ve got a massive period of deleveraging and weirdly low interest rates, maybe even deflation on the horizon.

- Major, major flaw: opportunity cost. I think most assets are roughly overpriced (as of Jan 2010) but there are some reasonable long-term ways to get yield. As I mention above, an IRA-like 529 plan should give you the ability to invest in e.g. long corporate bonds, plus you can get pretty decent returns tax-free on longish munis. Also, I think it’s very likely that in the next 5 years there will be some “screaming buys” and I’d probably want to stretch a little for yield, rather than locking it in to the current GET regime. Now, that’s a gamble and an opinion, but I also think it’s likely that GET and/or UW will play some games and that GET alone won’t match all of your obligations, so getting some yield outside that scheme would be good. But for purposes of feedback, the key thing is a full and fair accounting for opportunity cost.

Thanks for the comment.

- Our child is 1 year old and therefore we have ~17 years before we will use the money.
- We can fully fund the GET program this year (500 units).
- Based on data provided by the University of Washington, we calculated the average increase in undergraduate tuition for the last 11 years (1999-2009) at 7.8%.
- To estimate the cost of tuition in 2027, we took the total tuition/fee cost at U-W for this year (2009-2010, $7692) and applied 7.8% increase per year to reach $29729 per year.
- Based on GET’s pay out calculation method, the payout per unit is 1/100th of one academic year’s tuition and therefore we estimate that 100 units will payout ~$29729 dollars in 2027.
- If we fully fund now, we will need to pay $50500 ($101/unit X 500 units) and based on the above estimation 500 units will payout $148644 in 2027 (5 X $29729). This is about equivalent of investing this money at 6.5% APR (tax free).

Based on the above analysis and especially since we have a long horizon, even with the large buy-in price increase, it still seems like a pretty good deal to potentially get 6.5% interest “guaranteed” for 17 years. Not having to “manage” the investment or worry about it until 2027 is also very appealing. Even if tuition doesn’t increase at 7.8% and the pay-out ends up being more like 5% increase, that’s still not bad for a “secure” investment.

Please let us know if you think the above analysis is reasonable or if we are missing the boat. Thanks.

References:
http://www.washington.edu/admin/pb/home/pdf/tuition/2008-09-tf-history.pdf
2009/2010 at $7692 http://www.washington.edu/admin/pb/home/pdf/tuition/2009-10-tf-annual.pdf)