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Washington State 529 Program (GET) Update and Retrospective

[Update, November 17, 2013. If you read this post, *please* take the time to read all the comments, 60+ at present, which may stretch onto several pages. Readers and the GET itself have provided very important clarifications and perspectives (including some wrong or misleading ones) and it’s important to read *all* the comments. Thank you.]

Just over three years ago, I wrote a post entitled “The Washington State 529 Program (GET) Offers an Overlay.”  The post has since been the most-commented on the blog (many other comments having been lost when I switched to WordPress, unf.).  However, the post’s original thesis (as stated in its title) is now quite wrong, and I no longer recommend the GET and have not for several years.

This post will be mostly qualitative, as I do not have the time to produce a more rigorous analysis; I apologize, and feel free to add your take, qualitative or quantitative, in the comments.

I. The GET’s predominant characteristic is that it is an unfunded defined benefit investment scheme, which creates several inherent tensions.

There are two parts here: “unfunded” and “defined benefit.”  “Unfunded” means that, like Social Security, the system uses “pay as you go,” at least in part.  This means that, moreso than other investment types, the performance of the investment is contingent upon future buy-ins.  (Cynics would say “greater fools,” but that’s not really fair; lots of things are unfunded but entirely legitimate and not foolish.)

“Defined benefit” means that the scheme is promising some particular return.  Usually, when one says “defined benefit” one speaks of pension plans that have numeric formulas for determining or projecting specific dollar payouts; here, the payout is linked to state university tuition rates.  This means that, versus other investment types, the GET plan assumes the investment performance risk (mostly, but see below).

II. Comparison to insurance.

When you buy an insurance policy, the insurer makes money in two ways.  There’s underwriting profit, which comes from charging you slightly more than the actual expected (probability- and time-adjusted) value of paying off a potential future claim.  (E.g., there’s a 1% chance that your house burns down and they have to pay $250k, so they charge you $3000 for this expected $2500 liability, and bank $500.)  Then, there’s float profit, which comes from taking the money they sit on, and earning some investment return in the interim.

Now, insurance as an industry has been around a long while.  (If you want to know more, the colorful Andrew Tobias has written a book that is actually a quite engaging history and critique of the insurance business, believe it or not.)  And for “real” insurance, that is, casualty and life insurance (not health “insurance” which is, in my opinion, a vast and crass misnomer), the system works really quite well: the value of the asset that is insured is pretty well scoped out by the contract and by the market system.

Another fun benefit arises when you have big money at risk in casualty insurance: you’ve now created big entities that have a vested monetary benefit in making the world safer and less prone to fires, theft, flood damage, untimely deaths, etc.  This is because, except in fraud situations, the common adversary in insurance transactions is misfortune; that is, both you and the insurer would rather your house not burn down (though technically you sort of “win” back your premium if it does).  So insurance companies send out workplace safety inspectors, and mail you free cell-phone headsets, and offer discounts for driver’s ed and sprinkler systems and whatnot, and so they lower their expected payouts, increase their underwriting profits, and you stay a bit safer.  Win-win-ish.

With the GET, there are some key differences.  One is that the “casualty” being insured is your kid going to college (or you otherwise spending the dough).  This is virtually certain to happen, because even if your kid decides at 19 to go on tour with an all-handbell Steely Dan cover choir and eschew higher ed, you’ll find a nephew or neighbor kid or someone else to use the funds.  So there’s very little uncertainty about the fact and timing of payout.

The risk here is how much UW tuition is going to cost when your kid turns 19.  That’s the risk that GET notionally takes on your behalf.  It’s worth paying some reasonably large underwriting premium not to have to think about that risk (but see below).

III. GET is a governmental scheme and that can get wacky.

So, if GET were an independent entity, say a bank or insurance company, that said “no matter what UW tuition is, in X years, we here at Bear Stearns Lehmann Bros AIG Acme Bank will pay you that amount, in return for $Y today,” you’d think of the risk like so: Will this entity be able and willing to make good on its promise in X years?

But, there are two complications here.  One to the upside, one to the downside.

On the upside: GET notionally is backed with the full faith and credit of the State of Washington.  There are critiques here to be made, such as the fact that the backing is in statute, and not in the constitution, and that given sufficient political will, the legislature or the people by initiative could decide that a bunch of upper-middle-class tax-dodgers need to pay for their class’s sins and confiscate, dishonor, or otherwise do bad stuff to the GET.  But, probably, if the state is doing its usual stuff and the roads are paved and the ferries are sailing, the GET will get paid.

On the downside: GET is run by the same people who decide what to charge for tuition.  Yep, that’s right: the political interconnections between the GET leadership and the state financial and higher-ed communities are significant.  If the GET program should face a shortfall, any of the following options might start to look appealing:

  • Recharacterize a lot of the UW “tuition and state-mandated fees” to be not-quite “state-mandated” fees.
  • Keep an artificially low in-state tuition (perhaps making up the below-market rate by capping in-state attendance and jacking up out-of-state tuition).
  • Do some clever calendar-changing with trimesters / semesters / years / half-courses / whatever that effectively keeps nominal tuition low.

Look, this isn’t saying that anyone is corrupt, and I’m certainly not a Norquistian starve-the-beast type.  But consider what you’re playing for in this game.  You’re hoping that GET gives you more (risk-adjusted, at least) than a self-managed 529 plan would return in the public markets.  The only way that will happen is if tuition rise at a rate so much faster than the market return that it catches up to and beats the “underwriting” premium.

If that happens, then GET will be way behind, because all they’re doing is investing in 60% stocks, 40% TIPS.  Their options then will be to: 1. increase inflows (get more signups or charge a bigger premium), 2. get help from the state’s general fund (if it is politically available, which we should think likely), or 3. take some measure to limit outflows (pressure the university system to limit “tuition and state-mandated fees.”

To their credit, the GET leadership has started to jack up inflows, and is riding a wave of public disaffection with the stock markets and mutual funds to charge an enormously higher premium (underwriting profit), which is good for the plan’s solvency (but bad for those buying in today).

IV. Well, smartass, why did you recommend it in the past?

In 2007, when my niece was born and I looked into GET, the S&P was flirting with 1600 and attractive valuations were hard to find.  Risk premia were at all-time lows and P/E multiples at all-time highs.  Bubble-callers smarter than myself were ranting about real estate.  Investing on my own for an 18-year maturity seemed like a tough nut to crack, timing-wise.

At that time as well, as my prior post’s table points out, GET offered a more reasonable spread between purchase price and payout value.  In 2000, the premium was a reasonable 8%; in 2007, a rich but defensible 19%.  Today, the premium is a whopping 36%!  (Payout value, $85.92, buyin cost, $117)

I might point out that assets under management at GET have ballooned to $1.3 B over the past year, at the same time as fear has driven individual investors out of equity markets.  Therefore, things are going to look like smooth sailing for the next several years at GET.  The real problems are going to be years down the road, when investment performance has lagged and all of these new buy-ins become new payouts.

V. What’s the big point here?

Well, perhaps I missed the big point back in 2007.  Yes, it looked like a good idea then; you’re probably still getting the best of it if you bought in 2007-2008.

But the bigger point is about defined benefit plans.  The management of such plans seems to be an activity fraught with roadblocks to true honesty.  By “honesty,” I mean with a truly conservative and best-estimate view of what returns will look like, and what the ability to meet future needs requires of the plan.

For us as citizens, the message is that we need to apply oversight and demand hard-headed thinking, unless we want the near-certainty of having to fund notionally private pockets out of the public purse (see PBGC).

For us as investors, it means eschewing magic bullets, and being duly skeptical when we are promised a return without its associated risk.  (It also means jumping at opportunities when they are truly underpriced, as GET was for its first 8 years.)

I’d love to hear your stories about GET or defined benefit plans, and how you’ve thought about the associated risks.

76 Comments

  1. Roger says:

    Hi Randall,

    Thanks for your great update on this topic. Really helpful. Take care.

    Roger

  2. rob says:

    I’m a cynic and a realist but I’m not paranoid. WA will stand behind its GET because most of its participants are the solid middle class, and there will be no political will to deprive them (us) of ‘earned’ benefits. The language of the GET contract is such that it seems genuinely to protect participants from capricious modification of definitions (ie, of state-mandated tuition and fees). All in all, I think the promise will be paid. It may require general fund contributions, it may involved jacking up the premium even further, but it will be paid.

    At the same time, all my eggs are not in this basket. I think of my WA GET investment as the ‘fixed income’ part of my college investments; I have a 529 in Utah that is 100% equities that complements GET. This will fund either private school costs (since the GET only covers public university) and/or room, board, and other eligible costs of higher education.

    I bought 500 units in 2007 and another 500 in 2009. Currently the 2007 investment up 23% in 3.5 years is far outpacing the stock market (as measured by Vanguard’s total stock market index) which is down 20% in the same time period. However, the 2009 investment is up 13% in 1.5 years and is far underperforming the stock market which is up 59% during the same time period. So I don’t think GET is exactly getting hosed here; they have specifically stated they were able to attract a lot of new investments in the last 2-3 years and they were able to put a lot of that money to work at excellent prices during the 2008-2009 crisis. They’re doing just fine.

    Your skepticism for prospective buyers is warranted, but mostly based on price. I do not think GET is a Ponzi scheme, and I think claims will be paid. My confidence in this investment is fairly high.

    Thanks for the blog and the good thoughts.

  3. rlucas says:

    Rob, I think you’ve got the right idea — GET as a portion of the savings picture but not the whole enchilada. That’s how I’m treating it, too.

    We’ll agree to disagree on the due level of paranoia about the program, and I’ll agree that it’s not a Ponzi scheme per se; note that I explicitly temper my criticism of unfunded pay-as-you-go schemes by saying “lots of things are unfunded but entirely legitimate and not foolish.”

    However, I will jump in with some jailhouse lawyering on Rob’s take on the legalities: the “language of the GET contract” itself is not really the issue. The GET contract can’t constrain the legislature or the people via the initiative process. Also, politically, I agree that GET is aimed at “solid [upper] middle class” folks and sounds pretty sympathetic in a political stump speech, but strange things can happen over 18 years. The right parallel here is state pension and federal Social Security, in my opinion: it’s something that’s iron-clad and untouchable, until suddenly, it isn’t anymore.

    A couple of factual notes:

    Most importantly, GET does *not* “only cover[] public university.” Readers, be aware that you *can* use the GET cashout value for any legitimate FAFSA-taking school. (Rob may be suggesting that the price index that GET tracks is public school, which is true, but it’s probably a pretty decent proportionate proxy for average private school price, too.)

    Also not sure where you’re getting “up 23$ in 3.5 years.” If you bought in at the 2006-2007 school year price 3.5 years ago (today is 22 September 2010), you paid $70/unit, and today’s cashout value for 2010-2011 school year is $85.92. That’s up 22.7% over 3.5 years, or about 6% return annualized. (Rob is, however, making a great point: he earned that with much less volatility than if he’d been holding risk assets through the 2008-2009 financial crisis.)

    Thanks for thoughtful comments and critiques.

  4. […] This was my take on things back in 2007, when it was published.  As of 2010, both my opinion and the math have sharply changed.  I revisit the issue in a new post. […]

  5. rob says:

    Hi Lucas –

    yes, I meant that GET covers 100% of required tuition and fees at UW, a public school – in other words, it’s not enough to cover the cost of a private school and therefore, some parents will want to save additionally in another (more traditional) 529 plan.

    Last I heard, the GET trustees said the plan was fully funded. Naturally a lot can change in the next 20 years, but this is a good sign, considering where we’re at in the economic cycle.

    We’ll both hope they stick by their promise.

    You know, in 2007-09, before the big price increases, I came *this close* to maximally funding a 529 for myself. It just seemed like they were giving away high alpha with low beta. Even the 10% penalty wasn’t enough to deter me. I ended up not pulling the trigger – lucky me, as it turned out, because 1. it turns out the GET levies an additional 10% penalty (beyond the federal 10% penalty + taxes) when funds are withdrawn for non-qualified expenses and 2. stock investments in late 2008 and early 2009 are up 50-100% around the world and you can never be unhappy with that.

    I sleep well at night with this investment and yet, when my youngest heads off to college in 17 years I will definitely breathe a tiny sigh of relief and start depleting his GET. I’m confident it will last, but as you said, funny things can happen over 18 years.

  6. brianrazorback says:

    Interesting reading. I’m a new Dad and have done some research/reading on the GET program. I am in the fortunate position to fully load a GET account, but after reading these viewpoints am reconsidering. Although the stock market is certainly low, I’d prefer to be fairly conservative with my child’s education funds. Diving all-in is scary to me, especially given the guarantees of maximizing the investment at full amount right off the bat. Given these parameters, what alternatives should I consider to find a low to medium risk allocation of these education funds? Going the GET 529 route seems the easy thing to do, and “near” certain to bring returns. It seems every state has a plan however, and private financial firms offer value as well. It seems there are more options than I can wrap my head around (especially while changing diapers…). Any idea where you’d go with 50-60K in hand right now?

  7. rlucas says:

    Hi Brian,

    This is not professional advice, blah blah blah. But if I were you, I’d rethink doing the whole megillah as GET. There’s a place for it, and I’d say that place is between 5%-35%.

    The rest of the portfolio might best be put in a mix of TIPS and stocks. After all, that’s what underlies the GET itself. If TIPS and stocks underperform tuition by a small to moderate amount, you win a small to moderate amount on the GET bet. But if they underperform by a huge amount, I think that’s when the risk that the GET doesn’t actually track properly comes in. So your upside there is kind of “capped.”

    And, should the miracle happen of tuition growth slowing down, your TIPS+stock portfolio could actually beat the GET. (Remember, too, that the index is not to national tuition growth but to UW tuition+fees, which is ultimately a political and not a market decision.)

    And, while I know it’s technically “market timing” to suggest it, I wonder if investing a whole slug of cash today at once is the best thing for an 18-year horizon. Check out this Bogleheads discussion and its related threads: http://www.bogleheads.org/forum/viewtopic.php?p=105662&sid=12971934e2a87af7adb499c99bc78961

    The short form of that discussion is that while your expected value is slightly lower by “legging into it,” you reduce your risk of buying in at a peak right before a crashola. (Right now seems a shaky time to bet it all at once, given the economy and the can’t-go-much-lower state of interest rates.)

  8. rob says:

    the problem with TIPS is that they have a negligible real yield right now – at a recent auction the 5 year TIPS actually had a negative yield of -0.5%. That means you are accepting a guaranteed loss in real purchasing power for protection against future (unknown) inflation. That seems like a losing bet, to me. The problem is, bonds as a whole look like losing bets right now. That argues for less fixed income. But Brian says he wants a conservative investment. Therefore, one way to think about a plan would be take the $50k, and put 50% in a fixed-income investment with higher returns than bonds currently offer – aka, in GET. Take the other 50% and stick it in a stock fund, in a 529 in another state. Hold your nose and pray. Over time you’ll have to sell equities to get a nearly all fixed income allocation as you reach your child’s freshman year in school.

    In this strategy, you’re not buying GET for outsized gains – as rlucas has said that gravy train has come and gone. Instead, you’re using GET for the fixed-income portion of your portfolio. It will probably do better than bonds, even with the up front premium. For growth, you use stocks. Maybe a 50/50 mix is where you start.

    I wonder if there’s a role for using a whole life insurance policy for the fixed income portion of a child’s college savings? Since bonds are yielding nothing right now, a WL policy might offer higher yield with a high degree of safety. If you can find one with low enough costs (a big “if”) there could be something to pursue there. Such a strategy might also have the advantage of excluding money from a FAFSA or private college fin aid application, since it’s life insurance rather than an asset. Just thinking. This is well beyond my level of expertise, but maybe a consultation with a financial planner or such would be worthwhile.

  9. rlucas says:

    Rob, I find your implicit comparison between GET and whole life telling.

    Both are bets “against” financially sophisticated counterparties, in which you are sort of “hoping” that you “lose” — meaning, you would rather that the counterparty earn an underwriting profit and hence stay solvent.

    (In the case of GET, the reinsurer is the State of Washington rather than, say, Swiss Re.)

    But again, the insurer gets to sort of unilaterally redefine the benefit.

    If someone proposed to me a bet, say, $1000 payable in 10 years, that the 2020 GET payout is a significantly smaller proportion of “true” college costs than it is today, I’d take it in a heartbeat. (Meaning, I believe strongly that the temptation to redefine the benefit downward will, as in nearly all defined benefit schemes, become irresistible to the managers.) (This is not a solicitation to bet.)

    I think some minority of a kid’s college funds in the GET is fine. I just wouldn’t want anybody to 1. think they’re getting some great deal (i.e., suckered by the GET marketing), or 2. plow 100% of their kid’s college fund into it, which would amount to a big sucker bet that just goes to subsidize the earlier investors who got the best of it.

  10. rob says:

    Hi Randall,

    well now. solicitations notwithstanding, I might be willing to take that bet with you, though lets make it friendly rather than expensive. Dinner and a beer in 2020 say that 100 credits will still pay 100% of the tuition and required fees, +/- 10%. Ten years is a relatively short time for this kind of thing… 1098 getting defeated so handily really tells me the populace is not about to screw the middle class or even perceived upper middle class. Fifty years from now anything can happen. Ten years – I’m going to optimistically count on that.

    I like your explanation of the analogy between WL and GET. You’re right.. I’m giving up the potential for bigger gains in exchange for lower risk, lower volatility… and the ‘cost’ is the risk that the ‘counterparty’ can’t pay. well spoken.

  11. rlucas says:

    Quick clarification: I have very little doubt that the “letter of the law” will be true ten years hence. My strong bias is that the “tuition and state-mandated fees” will represent a smaller proportion of the “true” costs in ten years. Getting an accurate measurement of what I mean is probably tough, but I would suggest something like:

    * Take the total outlay on behalf of all undergrads at UW in 2010-11 (payments, transfers, offsets, etc. made by and on behalf of undergrads).

    * Divide by the number of undergrads at UW, to get the “true cost” per capita in 2010-11.
    * Repeat the procedure again in 2020-21 to get a “true cost.”

    My proposition is rather narrowly that the 2010 GET payout will be a larger proportion of the 2010 “true cost” than will the 2020 GET payout be of the 2020 “true cost.” In other words, I believe that more and more things will get characterized as “non-tuition, non-state-mandated-fees” but that actually end up being effectively required or extremely broadly adopted.

    For example, the cost of books would be one such item. Another might be “lab fees” or “activity fees.” I know that in other contexts, there has been argument over whether such fees are actually required/mandated (usually the result of someone trying to end-run the first amendment in one way or another).

    It gets quite hinkey when you start asking things like, “is internet access, parking, embedded neuro-uplinks (or whatever they have in 2020) really a necessary educational expense.” Pretty hard to measure.

    Just got back from a family trip to part of Appalachia where my grandfather went to a college with a working dairy farm and cornfields, and part of the “work-study” was literally feeding one’s self and one’s peers. So, let’s all just remember and give thanks that education is, despite the financial challenges, so widely available and relatively easily accessed today. (To my knowledge, such tribulations are today the sole province of intellectual experimentalists a la Deep Springs, and not a hurdle to general educational attainment for folks of limited means.)

  12. Jeremy says:

    I’ve got some newborn twin boys and have started the Utah 529 already on a monthly contribution plan to build up over time. My wife and I are both out of school not long and don’t have the $50k or so fully fund a GET for each boy right now and firmly believe in funding our retirement before the boys education (while not always a great idea, you can always borrow money for your kids education…nobody will loan you money to retire).

    Anyways, I’ve considered jumping into the GET for a chunk of their savings just for balance. Not sure if they are going to want to go out of state or to a private school or what, and my biggest concern about the GET is the 500 unit cap. If you fund the 500 units and your kid(s) go to Harvard, those 500 units will equate to less than 2 years of tuition alone. I like the current $300-400k cap on our Utah 529 (which goes up with time) vs that 500 unit cap on the GET.

    HOWEVER, as we consider adding some GET credits (the sooner the better as the cost is only going up), does anyone have any opinions on how to structure it for those of us with maybe $200-400 per month now (likely $1000+ per month in about 5 years) to contribute? Should we buy in lump sums (at the “premium”) or start a monthly auto-plan with its 7.5% finance charge?

  13. rlucas says:

    Jeremy, good question. I looked at the “auto-plan” about 3-4 years ago when my niece was born and I was horrified.

    If I understood it correctly at the time, it was like borrowing on layaway in order to buy the “units.” You locked yourself in to a commitment and agreed to pay over time, but not at any particularly favorable price (the same, I think, as if you paid in full). It made absolutely no sense if your cost of debt for such things was less than 7.5% (or more properly, whatever that 7.5% actually works out to as an APR / IRR / something commensurable. Be advised that lenders love to do things like quote the “annual premium” or other shenanigans rather than a commensurable, clear rate). Well, I should say it might may sense from a behavioral finance perspective, if you locked yourself into doing something good that you might otherwise forget or fail to do. But I digress.

    (I’ve not studied the newer payment plan system fully, so I don’t know if it’s changed.)

    I must again suggest that, for specific individual cases, the right thing to do is to find a fee-based advisor, perhaps one with the CFA designation, and buy an hour of his time professionally.

  14. tbenedict says:

    The State of Washington is considering getting out of the tuition setting business. If they do hand this off to the individual state colleges I wonder how that will affect GET? We’ve got a 7 and 9 year horizon for college entrance and have 200 units for each child purchased in 2008 and 2010. I’m considering getting another 200 for each before the price goes up in March. I gotta think that tuitions are only gonna skyrocket. More than one college president has said that the goal is to have state college tuition on par with private colleges.

    I’ve not had good luck in general investing and this looks like a ‘sure thing’.

  15. rlucas says:

    Betcha a nickel that how it would affect GET is that GET would no longer look like GET. As I’ve said before, the program works if you “lose” or if you “win” a little… but if you “win” a lot, you will surely be made to lose. My hunch. -R

  16. Jeff says:

    Great article (or series of articles). I found this as I was searching on the web to get the Washington GET Program history (buy vs redemption price over time). I was thinking something along the lines of what you have written though only in simplistic terms. I was fortunate enough to be able to fully fund 2 kids about 4 years ago. I just wanted to check the rate of return and have been astounded by the growing gap between the cost and redemption price. Thank you for the in depth analysis. It will spur me to really consider further options and be mindful of the political landscape in the state.

  17. Quin says:

    Nice analysis! I was thinking hard if I should enroll GET with $117/unit purchase price and $86/unit payout now. Apparently this is a much worse deal than past years and I fully understand putting all in GET is not wise.

    With a 5 yr kid and ~20k in hand, I am thinking if I shall do:
    1. All in Utah (age based option) plus future montly contribution (~$500).
    or
    2. Do a GET (100 units lumpsum) + Utah age based (~10k down + monthly contribution).

    Which one makes more sense or there is better alternative? I’d love to hear your opinion. Should GET be totally avoided now (it is obvious getting less and less attractive)?

    About the tuition rate increase – can it really keep hiking with no limit? The increase got to slow down and stablize at certain point otherwise majority people cannot afford colleage. I wonder are we already close to this point where GET (especially with $117/unit) starts yielding less than Utah 529?

  18. rob says:

    UW tuition can go up quite a bit before hitting a ceiling. Since Stanford is $39,000, and UW is $8700, you can at least plausibly describe UW as quite a bargain at these prices. While Stanford and UW are obviously not of the same reputation or caliber, the point is you are talking about a 75% lower cost to go to UW. What if UW were $13,000 per year? It would still be 66% cheaper than Stanford, and still potentially quite a bargain.

    The problem is the premiums on the units. That is more of a deterrent than the future rates of tuition growth. With the current premium of about 34%, it takes 5 years of 6% tuition inflation just to break even.

    If you don’t invest in GET, what is your alternative investment? Stocks are a little expensive now but not grotesquely so; for young kids that’s not a bad place to start. Bonds are very expensive and could yield negative real returns for years if not decades to come. No help there.

    If I had to make this decision today, I would probably buy 100-200 GET units if my child were very young, otherwise I would stay away. The rest I’d put mostly in the stock market. And I’d save a lot of money, knowing that investment returns were not going to save me.

  19. Ashley says:

    RLucas,

    I am a single mom with a new baby. I don’t know much about investing and have never done so, though I’m trying to educate myself. Investing in my daughter’s future is incredibly important to me. I had been looking into the GET program but now after reading your blog I feel torn and uncertain. In fact, I feel hesitant to do any investing now because I don’t know what is a smart investment – they all sound pretty good to me and at the same time pretty risky! I don’t have a lot of money to contribute at this point, but hope to do so over the next 18 years. I do have family, however, who want to contribute and I want to give them a good plan in which to contribute.

    I am a member of USAA and have been reading up on their 529 college savings plan, but once again now I’m second-guessing if it’s a good choice or not. Is USAA’s college savings plan worthwhile and “good”?

    I know you can’t provide “professional advice” but I don’t even know where to start. I hate feeling like my hands are tied behind my back, but I feel that way now – and am afraid I won’t do anything at all for fear of doing the wrong thing. And honestly, despite all of this “self-educating” I’m attempting to do, it doesn’t seem to help much because understanding the market is a science. And I’m no market scientist! So what does a single working mom with little time to learn the “ins and outs” of investing and little money to hire my own financial advisor, do?

    Thank you, thank you.

  20. rlucas says:

    Ashley — read Andrew Tobias’ book, The Only Investment Guide You’ll Ever Need: http://www.amazon.com/Only-Investment-Guide-Youll-Ever/dp/0547447256/ref=tmm_pap_title_0?ie=UTF8&qid=1295655866&sr=1-2-ent

    USAA is better than average, as is Vanguard or most credit unions. I dunno about their 529 offerings.

    Don’t sweat it — if you “leg into it” over 18 years, it’s unlikely that any decisions you make today will permanently make-or-break baby’s college financing decision (unlike, say, if you had the entire tuition lump right now, could never add to it, and had to make it grow to the size of tuition 18 years hence). Just keep saving and investing. “Fire and motion,” as they say — don’t get pinned down. Keep saving and investing.

    …and keep learning! But remember, don’t get too fancy; the limit of what you can hope to achieve, without becoming a full-time financier, is to make a little bit less than the stock market does, with a little bit less risk. That is all.

  21. Nick says:

    Is the main problem that you are paying $117 now per unit and the value of the unit at this moment in time is $85? Using their table, if I have a newborn with a 2029 projected benefit year, and I want 200 units (2 years tuition), it says I will need to contribute $198 a month for 18 years.

    If I contribute $198 a month then I am GUARANTEED that 2 years of his tuition at UW or WSU would be paid for right? Even if the stock market goes way down and other random things happen those 2 years of tuition are guaranteed correct? Thanks.

  22. rlucas says:

    Nick — no, the problem is that the present value (discounted at 5%) of paying $198 a month for 18 years is $28 grand. Think about that. Would you pay $28 grand today in order to guarantee two years of tuition? (Not trying to be an asshole here, but if you are trying to understand the system you have to at least start with a financial calculator and how to do TVM calcs.)

  23. Rich says:

    A premium of 34.5% is pretty steep. It’s like investing in the stock market today and seeing a 34.5% decline in value the next day.

  24. Billtg says:

    Great discussion! According to published historical tuition and fees, UW has increased 8.75% per year over the past ten years, 9.17% pa over the past 5 years. The governor has proposed an 11% increase for each of the next two years. If these occur, the payout then would then be equivalent to $107/unit, not far from today’s price of $117/unit. Couple this with the proposal to allow individual schools to set their own tuition rates, now being considered in the state legislature, and you have a good indication that increases in tuition at the UW will continue to outpace any “safe” investment in the open market. Even with the new legislation passed in the state senate (GET II), it appears today’s participant (at least through March 31) will be “grandfathered in” with the UW (highest cost institution) being the base line for payout.

    There is risk involved in the GET program, but it seems more a political risk than a monetary risk (as would be the case with other 529 programs). With a time frame of 10 yrs., using the historical rate of tuition increase, the GET at today’s prices would be equivalent to a 5.5% return, but tax free and guaranteed (not ignoring the comments of non- supported fees vs supported fees, which would be subject to political scrutiny). While not a incredible return for a market investment, that performance seems adequate for what should be a very low risk education fund.

    Next year’s GET (II) may not stand up to this scrutiny as payout will look at average tuition rates rather than the highest institution. However, as discussed above, GET 1 still seems an okay portion for a diversified college investment, given a 10 year or greater time frame.

  25. rlucas says:

    Another thing comes to mind — I did some update reading on this and other states have gone back and applied rules to the redemption that cause greater “breakage.” For example, limiting the number of times the beneficiary may be named, denying payout if beneficiaries start, stop, then re-start, etc. So there are additional risks that are sort of a mix of political and game-theoretic, because the rules of the game can be changed during play.

    I hadn’t heard about the change to average rates, but that’s right in the vein of the kind of risk we’ve been discussing here (though, thankfully, it appears it only applies going forward?).

  26. rob says:

    what it reads is (sorry for formatting):

    “The value of each tuition unit at
    8 the time of redemption shall be the price of tuition and fees at the
    9 time a purchaser enters into a tuition unit contract multiplied by the
    10 average percentage increase of resident undergraduate tuition and fees
    11 at all state institutions of higher education weighted by the number of
    12 full-time equivalent resident undergraduate students.

    http://apps.leg.wa.gov/documents/billdocs/2011-12/Pdf/Bills/Senate%20Bills/5749-S.pdf

    So that’s confusing, but it sounds like it would no longer be the most expensive school. This would potentially be a significant loss of potential investment gain. More to the point, it would be very hard to predict your returns over time. Also, it doesn’t address the issue of the current premium being charged; from the above it sounds like you take the current average tuition/fees, and multiply it by the percentage growth of all schools. Where’s the premium?

  27. rob says:

    well it’s definitely getting interesting.

    SB 5749 has passed the Senate and now goes to the house. It changes the program for new participants but (for now) leaves the program unchanged for existing participants:

    http://seattletimes.nwsource.com/html/localnews/2014505359_apwaxgrprepaidtuition2ndldwritethru.html

    What’s ironic is even the GET director says it’s a solution looking for a problem.

    Many years to go while awaiting these kinds of shenanigans to play out.

  28. rameses says:

    Here is how I look at GET – it is a hedge against my own savings and investments. If the market tanks and my own investments face a shortfall by the time my kid is in college, GET will pick up the tab. If GET is modified to my detriment, then I will still have my savings/investments to fall back on. And if both GET and the market fails, well… we will have bigger problems to worry about if that happens.

  29. rob says:

    Gregoire proposes 11% annual tuition increases x 2 years… House proposes 13%… Senate proposes 16%. Could not have imagined these kinds of numbers in my wildest dreams 2 and 4 years ago.

  30. Laura says:

    Still waiting to see how/if it plays out before the April 30th contribution cut-off for existing program participants. I’d hoped to have a few things decided by next weekend, but our WA state legislature is going to need special session… so more to come before anything is resolved with the proposed tuition increases, individual colleges with tuition-setting authority, and Senate Bill 5749.

    My son’s GET account has 200 units accumulated so far, he’s in sixth grade and I threw as much as I could (lump sum) into contributions since ’07, mostly when the unit price was in the $70s and $101. Running the numbers over the last couple of months, I’d considered purchasing up to 100 more units by April 30 based on various scenarios including up to 13% tuition increase. Didn’t run anything near the 16% tuition from the Senate budget proposal… didn’t anticipate the budget would include that big of a hit to higher ed.

    I’d already decided that this would be the final year I’m adding to my son’s lump sum account. Steep increases in GET contribution rates are coming, exceeding what we’ve seen since the program began playing ‘catch-up’ in the last three years. Just for giggles, I’ll guess the May 1 2011 GET unit contribution rate will jump from $117 to $141. Anyone else want to offer a guess?

    Will GET change? The actuary’s report on GET seems to discourage the changes proposed in the original Senate Bill 5749; but whether or not 5749 passes this year, there will probably be some changes over time that are likely to diminish the value of this program. But I believe the state will stand behind the rules that were in effect for my contributions, and that changes must be designed to ride on future contributors. Personally I can’t see why anyone would buy-in under 5749’s GET II proposal that averages the pay-out per unit based on all state colleges (including community colleges). But there are always some who will say a program like this is still a good fit, even if it doesn’t provide the same benefits we grabbed by participating early-on.

    So for my son’s future education, I’m contributing just one more time to GET, before April 30, 2011. I’ll be watching what happens in Oly this week related to higher ed and the GET program, run a few more numbers, and make a decision on how many more units to buy before the end of the month.

  31. Oliver Jen says:

    I got caught up a little bit into the mob mentality around the potential legislative change that’s afoot. Coupled with what looks to be a 3rd child on the way, I bought up 500 GET credits. For my 1st (2005) and 2nd (2007) kids, I started 529’s (DE & NH respectively) and the plan of record has been to continuously trickle money on a monthly basis until they reach college-age.

    #1 has done OK, with an annualized 5.79% rate of return.
    #2 has done better with 8.79% ROR.

    Both caused me heartburn through 2008-2009. I found something about the rate of WA tuition growing faster than either of my 529’s over the same period and thusly jumped into GET. I do wish that I stumbled unto this blog earlier; I probably still would’ve purchased GET credits, albeit less.

    By the time they go to school, all 3 pools should be roughly the same size and I hope to load-balance the tuition costs of my kids between the different 529’s/GET.

  32. rob says:

    by fall 2012-13 UW will be $11,700 or more. At some point tuition increases will slow down, but maybe not soon. Apparently they may be able to increase tuition even more than the 16% p.a. this is all kind of craziness.

    changing the rules for money already contributed would guarantee big lawsuits and very unhappy voters. I don’t think they’ll do that.

  33. Mike says:

    I recently chose a 529 over GET, but given the 20% increase next year alone I do wonder if this was the right decision. Will be interesting to see what price is set for GET units next year.

    College tuition sure seems to be in an unsustainable bubble, but like all bubbles they can keep going far longer than you think. I’m also not sure what it would look like for the tuition bubble to burst — this is very different than an asset bubble.

  34. ganesh says:

    Yup! A giant, totally avoidable, Ponzi scheme. The way it is structured, somebody is gonna get hurt real bad – taxpayers/ universities or the students – perhaps all of them.

    Why is there a need for the state to ‘guarantee’? Why can’t it be just like other states which have regular 529 plans?

  35. Mike says:

    The GET unit price for 2012 increased 39% from $117 to $163. The premium for units is now more expensive than ever, but I’m still not sure what to make of this program.

  36. rob says:

    well. I think that pretty much settles it. Pay a 60% (!!!) premium over current tuition? No thanks.

    Let’s say tuition increases 10% per year for the next 18 years, so it is $55,600 per year. (Personally I think this rate of growth from current levels is completely unsustainable and unrealistic, and anyone predicting this is victim of recency bias.) But anyway. You had to pay $163 x 100 = $16,300 units for that in today’s dollars. That rate of growth is 7% per year, nominal. That is significantly less than the 10% historic rate of return of the stock market. Even if the stock market returns less than it has historically – say 7% nominal – you have more control with a traditional 529 than with the GET. You are not at risk for government failure, bankruptcy, or mismanagement of the GET.

    The downside for current GET owners is how the state is going to keep attracting money from new investors to make this sustainable. This price is really just out there, way out in the stratosphere, beyond any reason (on the face of it). It’s to my advantage as a current owner to have new money being added at all times but my honest opinion is this would be a no go if I were still shopping.

  37. Kirk says:

    $163–??? —I’m trying to wrap my head around this situation—I am in at $66 per unit but I’m having a hard time being confident about the future of this program. The main appeal for me was the stability of 529 but now it seems as sketchy as the market in general—-I can bail (less 10%) —undecided

  38. rlucas says:

    Kirk — this is not investment advice blah blah — but I’d say if I were in at $66 buyin price, and if I had at least 6-10 years to go, I’d stick it out. If it’s 1-5 years until you’d use it (kid in the teens) then it’s more of a wash. Long story short, those of us who got in in the sub ~ $70 range are getting the best of it — and those who buy in today are getting hosed, IMO.

  39. JohnB says:

    Thanks rlucas for this and your previous blog on WA state GET. I started contributions for my kids back before 2000, when there wasn’t much internet info available about the program. My kids are both fully funded for 500 credits each. I think when we started it was $41 per unit. My oldest is now a junior in High School, and will be using GET in a little over a year. What I have been unable to find anywhere, is how has this program worked for people whose kids have now finished college? Do they feel their GET investment was worth it? It seems to me I have spent a lot less for their tuition then if I had to start paying now at today’s tuition rates, unless they decide to go to a much cheaper school or choose trade/vocational/military training vice college.

  40. JeffG says:

    Great blog. Thanks $1,000,000.

    I wanted to repost/share your data from the original article with some additions. I can’t find some data for payout in ’08 & ’09 and just guessed. Would love to get the exact figures.

    Year Purch Pay
    1999 $35.00 $33.75
    2000 $38.00 $35.19
    2001 $41.00 $36.42
    2002 $42.00 $38.64
    2003 $52.00 $45.31
    2004 $57.00 $48.63
    2005 $61.00 $51.81
    2006 $66.00 $55.05
    2007 $70.00 $58.80
    2008 $74.00 $64.00*
    2009 $76.00 $67.20*
    2010 $101.00 $76.00
    2011 $117.00 $85.92
    2012 $163.00 $102.23

    * – unconfirmed data, approximations

  41. Travuw says:

    Outstanding blog and discussion. I found this immensly informative and helpful in my decision making.

    The post above illustrates the massive departure in viability of the GET program for new investors.

  42. rob says:

    Differential tuition on the horizon. Hidden deep in the Seattle Times in late January was an article about how pending legislation would let GET off the hook for differential tuition (engineering vs teaching vs english).

    To this I say this is a no-brainer breach-of-contract lawsuit. I invested $73,000 on the birth of my 2 children and I will fight tooth-and-nail to get what I paid for. I’m tenacious enough to fight, I’m connected enough to get a good lawyer, and I’m wealthy enough to pay for his or her services. Go ahead, test me (and the thousands of other parents who did the same). The intent of the law is clear. A fee is not tuition. Differential tuition is tuition, and as such, is covered by the contract. This would be fun to litigate.

  43. Paul says:

    I find it stunning that washington is asking todays investors to pay for yesterdays mistakes.

    Watch the debates and read the docs, todays fees of 168 is not just to pay for your child, it clearly states it partly to make up the short fall.

    Not only is this wrong we would vote out everyone involved in this. Rather than deal with the mistakes and be honest about it they have hidden to short fall into the new investors costs.

    A new buyer will be paying for people who got in cheap years early. I cant recall the number but it think it was $25 per unit.

    It seems grossly injust. I fairer move would have been to simply close the fund and open a new one that would pay for itself . And the gov could fund the short fall, not me.

  44. rlucas says:

    Paul,

    Really? You’re stunned?

    If the GET 529 was a “good deal” to buy into, it was a “bad deal” to sell. (Leaving aside preferences around risk-taking and volatility, which are legitimate trades.)

    Since anyone who does his diligence knows what the GET is invested in, and since that underlying portfolio is easily and with minimal cost reproducible (ETFs / mutual funds), the only reasons you’d invest in GET is if you thought it was a better deal than replicating the portfolio yourself. That means tuition outpacing the portfolio (meaning an inevitable shortfall on a per-year-cohort basis) [or you agreeing to a premium for offloading your risk/volatility].

    If you think that tuition will outpace the portfolio (meaning a per-year shortfall), then the whole reason you’d buy is because you expect either the state, or later entrants into the scheme, to bail you out.

    So, if you do your homework, you shouldn’t be stunned. (Since you’re here on this blog, kudos, you’re doing your homework.)

    As for the injustice of it: I have mixed feelings. In theory, it’s far MORE just to keep the program open at higher prices with the expectation that some people are legitimately willing with full knowledge to pay a higher premium for offloading the risk to the GET, than it is to expect the state to bail out the early investors. In that case, you’re only making transfers between willing players (early / late) and not forcing the rest of the population at gunpoint to bail out the early investors. (Although I am not a Norquistian about taxation, it is helpful when considering the justice of a government measure to remember Mao’s maxim about political power.)

    However, in practice, it gets messier. We can reasonably infer that the people who are buying into GET today aren’t some sort of uber-calculating, highly-risk-averse robots who have it all figured out. They’re worried parents, like many commenters on this blog, who are probably financially unsophisticated (since 95% of the population is financially unsophisticated). They are not running spreadsheets, and Sharpe ratios, and weighing tradeoffs. They are using social proof and a usually reasonably well-placed trust in the probity of American governmental institutions to make the decision. And they don’t realize [the full implications of the fact] that they’re bailing out the early folks.

    So, as always, it’s slightly more complicated. Where is justice in this: Keep soaking the rubes, who after all pays their money and takes their chances, or shut it down and force poor people paying regressive sales tax in WA to bail out upper-middle-class penny pinchers? (Or the dark horse option, which I see a real, double-digit % chance of happening: renege on the guarantee and refund amounts back to investors.)

  45. Rob says:

    I dont see refund standing up in court, nor do I see renege winning a majority of voters. I think the way out is continued muddling along with high Permian for new entrants, plus/minus a smallish state bailout and simultaneous closing of GET, with a new program called GET 2 to replace it.

    Honestly, I’m minimally worried.

  46. Siri says:

    Hi all, i am thinking to take GET program this year which is $163 per unit. But the payout pirce is $103. Is it worth it to take this program for a 9 year old son? Please advice.

    THX

  47. Paul says:

    we really wanted to find a way to make this work, we liked the idea of buying into a program where we knew our children would be able to go to college without a large debt.

    However @ $163 per unit we just can’t make it work. We have the money ready to buy 1,000 units for our kids, and if we invest that over the next couple of years into a 529 it appears that even with below average returns and above average college fee increases we would still do better than the Washington state GET program.

    If I have got this wrong someone please correct me.

    Paul

  48. Jamie says:

    I have a 3 month old son and would like to start saving for college. I can only do monthly payment plans right now. I did the math for the GET payment plan (at 100 units) and i’d end up paying 30k for what costs approximately 10k today. Is the rate of tuition increase really going to sustain this to make the GET payment plan worth it? I could just put 139/mo in a savings account and have a guaranteed return. I’m a nurse, not a numbers cruncher! Any advice would be appreciated.

    thank you

    jamie

  49. rlucas says:

    Hi Jamie, Paul, Siri — thanks for reaching out. As you can understand, it’s impossible to give good, personalized “advice” in this kind of forum (and, for that matter, it would be irresponsible and possibly illegal), so I won’t try to address each of your specifics.

    But my general opinion holds: whatever “edge” the WA GET once seemed to hold has vanished, and it now seems “expensive” to my eyes. It’s not untouchably horrible, especially if you have a long time (over ten years) to wait. But it’s not a sure thing, and I think it would be disastrous to put all of one’s eggs into that basket, given the kind of risks discussed on this blog (not only risks around performance, but around politics).

    Honestly, the mere fact that you’re trying to work this out numerically puts you well ahead of the crowd. 😉

    Please consider strongly paying an hourly fee-based financial planner to work you through some scenarios.

    For Jamie in particular: before you start forking out that $139/month, do you have term life insurance and long-term disability insurance? (You likely have some crappy and insufficient insurance through your employer.) Perhaps if you don’t have a big chunk of capital right now, and are depending upon your own personal earning power to build up some of that tuition, then it makes more sense to take care of some of the unpleasant but real risk of losing that earning power. Again, this is not personalized advice, but a question to ask yourself / your financial planner.

  50. Rob says:

    I just learned that Massachusetts has a no-premium prepaid tuition plan. If your child goes to a non participating school you only get CPI adjusted returns. Compare this to WA GET, which has a high premium but is also fully transferable to any school. If your income disqualifies you for tax free I bonds for higher education, the MA plan may be appealing.

    16% tuition increase coming shortly.

  51. Donald says:

    After reading today’s piece on Komo;

    http://www.komonews.com/news/local/Washs-GET-program-begins-new-year-under-scrutiny-176687051.html

    I have been considering getting out of the program altogether. We bought into GET back in 2001 and it was very appealing when comparing it to other investments for my children’s education. Now I’m not so sure it will be there at all. The big question I have now is would it make sense to continue to spend money on this program month after month with the possibility of failure or take the lump now and invest it in the market where I know I can make some reasonable returns. Granted; there is no way I can make enough on them to compare to the buy in rate I originally signed up at but the risk/reward may be better in the end.

    What was I thinking!?!?!

  52. rlucas says:

    Hi Donald — I wouldn’t fret too much. (Maybe just one question mark and one exclamation point worth 😉

    There is little danger that the plan will “fail” wholesale, but I judge there to be substantial risk over the medium term (say, 7-10 years) that it is made to fail to track the original benchmark. See my other comments. But even accepting that tracking risk, you might rationally decide to invest if you have a long horizon.

    I would, however, say that if you’re putting in money month-by-month, you should PAUSE and reevaluate: in effect, you’re making a new choice every month that it’s a good bet and the best use of those funds. Pre-committing yourself to buying GET units over time is, in general, throwing away the new information that you receive each month. (Plus, if I recall correctly, the installment plan includes a finance charge which is a terrible, terrible deal for you.) But again, you might accept that if you believe there’s a behavioral finance reason to pre-commit (e.g. the Ulysses tied to the mast idea).

    You can’t get out of the program, as I understand it. No way to redeem the units except on educational expenses. So don’t worry yourself about the checks that GET has already cashed…

    As to what you were thinking, it was probably some mix of two things:

    1. I want to do right by my kid(s) and make smart, disciplined choices that will reduce risk and increase opportunity.

    2. I can get an “edge” or I can “beat the system” by snapping up this hot deal.

    If #1, good for you, if #2, shame. If a mix, then good/shame in the appropriate ratio 😉

  53. Eric says:

    I don’t see the inherent downside of the get. Right now, WSU’s yearly instate tuition is 24k and out of state is 37k. The current unit price is $172. So if I buy 100 units which the amount of units one year costs, the price I would pay for my son’s first year is just over 17k.
    However, if I put money in and pray for the stock market to increase my principal in value, I am taking on that risk. What if, in 18 years, the market plummets and the share price drops, I would no longer have the amount I’d “saved” due to market fluctuation.
    So, the GET makes more sense to me assuming tuition rates rise dramatically as they are expected to.
    Hmmm

  54. rlucas says:

    Eric, I reply with such immediacy and force not to dress you down but to let you know that your assumptions must NOT be relied upon!

    GET is indexed to the “most expensive” state university, which is almost certainly going to be UW Seattle.

    WSU in-state tuition is $5693 per semester, or about $11.4k per year. See http://www.finaid.wsu.edu/coa.html

    The GET “Payout” (which is indexed to UW, as I indicate above) is valued at $117.82 per unit, or about $11.8k per year (year=100 GET units)

    Buying in at $172 is an IMMEDIATE loss of $54 / unit. (That does not take into account of the subtle and hard-to-quantify risks we’ve discussed on this blog.)

    Please don’t make the mistake of believing that you are buying a $24k year for $17k.

  55. Ruby says:

    Having accumulated a chunk of GET credits (~50) for my 4 and 8 year olds, at this point it seems like a good idea to start hedging my bets with a different college savings vehicle. Any recommendations for a good (non-GET) 529 plan for WA residents to use?

  56. rlucas says:

    Vanguard comes to mind. It’s really just a 529 “account” rather than a plan — you can choose from Vanguard fund options.

  57. Scott - Puyallup says:

    In 2010 I was fortunate enough to afford to buy my kids each 500 credits at $101 per unit. Sure, one year after the $76 per unit cost, but tuition was skyrocketing at the time so it seemed smart.

    When I purchased in 2010, GET employees said “you should not plan to use them for two years at least”. My kids will start college in Fall 2016 and Fall 2018. Now it seems GET employees would tell enrollees six years or more to wait? Talk lately is on limiting tuition increases at State schools. It doesn’t seem as good an investment. Now today in a KOMO story, there is talk of ending the program altogether…

    I have a new child on the way…big age difference than my older two children, but I can’t see the same value any longer in GET than even 3 years ago, or am I mistaken?

    When I was in college 25 years ago, I was not poor enough to get financial aid, yet not rich enough to pay tuition out of pocket. The middle class curse. Student loans were my savior, along with working while in college. At least when I purchased, the program was a good “middle class” option for college planning.

  58. rlucas says:

    Scott, interesting problem you pose: given that you have 1,000 units purchased at 2010 levels ($101k) and three children, entering in (estimated) 2016, 2018, and 2031, what is the optimal strategy?

    I have too much work to do this week to figure out the answer, but I’m sure it’s a tractable optimization problem. Have you done any math on this?

  59. bb says:

    So for someone looking at 529 plans today, July 2013, for a 5 and 7 year old, what would you recommend? Seems the GET may not be the best option. Recommendations for other 529s?

  60. rlucas says:

    Hi BB,

    I’m not in the position to give advice, but my opinion on GET these days is clear from the above (especially for a 7-year-old). If the tax treatment of 529s is what you’re looking for, probably the best thing to do is find a 529 plan that lets you buy low-cost index funds and do an asset allocation within the plan account. As I mentioned below, I think Vanguard does a great job of this — including an automatic, age-based reallocation program. (Note that if you live in a state that, unlike WA, has a state income tax, there may be tax reasons to deal with your own state’s plan even if it has crappier and more sneaky-fee-sharking options.)

  61. Prateek says:

    Hi,

    I just got email saying that payout stays same for 2013-2014 to $117.82.
    However as per UW website (https://admit.washington.edu/Paying/Cost#freshmen-transfer), the annual cost for resident freshmen is $12,950.00.

    So the unit price should have increased from 117.82 (for 2012-2013) to 129.5 (for 2013-2014).

    Do you know why there is no change. Am I missing something?

    Thanks,
    Prateek.

  62. rlucas says:

    Prateek, I bet that’s just a typo, but I can confirm that both on the website and in an email I’ve received from GET, the 2013-14 payout number is the same as the previous 2012-13 number (117.82). I’ve put in an inquiry to the GET media office, and I’ll post here what I find out.

  63. rlucas says:

    Hi Prateek et al.,

    I’ve done a bit of research and confirmed with GET that the 2013-14 payout number is indeed the same as the 2012-13 number (per personal communication with Susan Martensen, press contact for GET). This is because the UW in-state undergrad tuition has not increased, according to the GET and to the latest available minutes from the UW Regents: http://www.washington.edu/regents/meetings/2013/meeting-minutes-for-2013/minutes-july-1-2013-special

    “Additional state appropriations were provided by the Legislature in order to enable the University to avoid increasing tuition for undergraduate residents, thus undergraduate resident tuition will not be increased in 2013-14 or 2014-15. Any increases in net tuition revenue from undergraduate residents will be a result of enrollment increases rather than tuition changes. Increases will be required for other tuition categories, as discussed in a later section of this item.”

    Prateek’s comment below (above? depends on how you sort the comments…) has at least two mistaken premises in it. First, the UW website link he posts indicating 2013-14 UW tuition and fees of $12,950 as of today is only an estimate published by the admissions office; my guess is that they haven’t yet updated it to the 01 July 2013 Regents-approved numbers in the minutes I linked to. (Those Regents numbers say $12,383, of which $11,305 is tuition proper.) Second, there’s a definitional question (most likely around state-mandated fees) as to what constitutes “the number” on which GET payouts are to be calculated, so you can’t just look at one statement of “tuition and fees” and assume that it’s the same number that GET uses.

    GET also clarified in an email to me that the fee calculation includes “building fees and services & activities fees” but not technology, and certain other, fees. Finally, for those of you counting beans along at home, who want to get down to the last couple of decimal places, UW-Tacoma is actually the benchmark GET used for this year’s calculation. Perhaps if a reader does the math and is kind enough to post?

    Hope this is helpful to you readers. It’s also worth noting that assets in GET have ballooned by almost another billion since this post was written. Great for solvency of the program. But it kind of makes me queasy to think about all those hopeful, trusting parents and grandparents who just put a $B into bailing out the early GET-holders.

  64. BC says:

    Two things I was unaware of when I bought GET credits (thank god back at $66):

    1. That there was a payout less than the value I paid in. I thought they were just selling pre-purchased tuition.. silly me. The spread was minimal back then, but I’m sure there are parents and grandparents making that same mistake now, and getting absolutely ripped off with the immense spread.

    2. That you can only use 125 GET credits per year. I bought 500 & figured that would cover the first year & a half w/o need for cash augmentation, but I can only get about $15k out of GET per year & will need another $15k-$20k cash per year. What a crock o BS that is. I bought credits for college but they only want to trickle it out to you in hopes you dont use it all.

    They really do need to shut it down. At the current spread, and the withdrawal caveats, it really is a scam the state shouldn’t be selling.

  65. cs says:

    Thanks for this discussion. There’s a lot of talk about how the state may end GET leaving participants high and dry, so wanted to add a little info and analysis.

    Section 7E of the Program Details document explains the process for ending the program:
    Remaining Tuition Units. The remaining Tuition Units for all Students who have either enrolled in an Institution of Higher Education or who are within four years of their eighteenth birthday
    shall be honored until such Tuition Units have been exhausted, or for 10 fiscal years from the date the Program was terminated, whichever comes first. All other Account Owners shall receive a refund equal to the current value of the Tuition Units in effect at the time of termination, as determined by the Committee. The Program will not assess refund fees for refunds issued in
    conjunction with fund termination.

    If I’m reading this correctly, participants 14 and older are ensured payment as long as they use the fund within 10 years. Younger participants are repaid at the going rate for new unit buy in.

    Because of the payout terms for younger beneficiaries, this means even for people who bought in at $101/unit and assuming no more unit buy-in price increases above the $172 today, they have a “risk free” return of at least 5% annually (($172-101)/$101/14 years). Now, the administrators could do something like close the plan, change new buy in to $5/unit, and then cancel it so they repay folks pennies on the dollar, but I’m guessing that’d be against the administrative guidelines and subject to court intervention. In short, if you’re in the program, there’s little value in pulling out as bonds aren’t paying anywhere near your minimum GET return rate.

    For new investors, assuming full buy in at $172, tuition would have to increase from its $117.82 at less than 3% to break even in 18 years. Under 3% is less than the historical long term cost of consumer inflation so the likelihood of coming out positive is good. See also: http://www.finaid.org/savings/tuition-inflation.phtml

    So what’s a person to do, I’d say GET should be viewed as the conservative part of your education investment portfolio. Depending on your risk tolerance, you should augment GET with a separate 529 invested in equities.

    For that reason, I think GET still makes some sense. It’s certainly not a “scam” as its terms are publicly stated if you take the time to read as you should with any financial transaction. There is policy risk, but that’s true with nearly everything. Additionally though, I think GET has better staying power because its value to participants and perceived value to non-participants increases when the economy sours.

    Tuition spikes are usually inversely correlated with the economy. When the economy sinks, tax revenue decreases and states cut funding for higher education. At the same time, your 529 portfolio will likely sink with the market and GET would have to raise its buy-in unit price for solvency. Political and legal speed the way it is, the buy-in would likely rise before the program would ever be cut, so you earn a nice little premium even if they repay participants according to the 7E rules above. However, given the flight to safety behavior people exhibit during downturns, I’d guess GET would see increased demand helping it remain solvent – essentially a repeat of what’s happened since 2009.

    In the end, the GET of today probably won’t be the GET in 15 years, the tuition/fees will change and the program may close to new investors. But as long as you don’t make the move to cancel, and the plan remains for at least a few more years, you will make some return on your investment. In any case, the chance of you losing any more than the opportunity cost of having invested elsewhere is very low.

  66. rlucas says:

    CS, thank you for the post, and in particular for surfacing the windup/refund mechanics of the plan, but you’re dangerously incorrect about several things.

    * You misunderstand the windup/refund mechanics. You say “[y]ounger participants are repaid at the going rate for new unit buy in.” No, no, no. They are paid the “curernt value of the Tuition Units,” and the Tuition Unit value is the PAYOUT value.

    * That means your math about “risk free [sic]” return over 14 years is wrong.

    * You are making the mistake of ignoring opportunity cost in your “tuition would have to increase … at less than 3% to break even in 18 years” statement.

    * The correct benchmark for actual “risk free” returns over 18 years is the US Treasury. On Friday the 20-year yielded 3.5%, so we can guess 3.3% or so as the 18-year yield. 18 years at 3.3% gets you $308, which is the number you want to use, not $172, to benchmark against.

    * You are ignoring what fixed income guys call “prepayment risk” which subjects you to “reinvestment risk.” Since we’re talking about covering known liabilities in the future, having GET quit on you 13 years in the future and put your money back to you with only 5 years to go is actually catastrophic, since at the beginning you were playing out the yield curve at 18 years (can get higher %) but now you have to find a way to get that much yield in a 5 year maturity investment. Oops. Explaining this is sort of hard but it means that if the U.S. Treasury promises that they’ll send a batallion of Marines to deliver you 5.5% worth of yield over 18 years, anybody else promising you an 18 year yield had damn well better offer you more (particularly if the security itself gives them a put option to give it back to you whenever they want).

    Sorry if that comes across as harsh. I don’t want to discourage commentary but it would be disastrous to make investment decisions on that math.

    I do also like CS’s observation about flight to safety times, although it’s very hard to quantify (and, of course, an 18-year treasury would benefit even more from such a thing).

  67. cs says:

    Thanks and no worries on being harsh. Better to be taught a lesson in cyberspace than in the pocketbook.

    Yes, fundamental error on the Tuition Unit vs Unit Price. Advice to others, don’t try to read documents/make decisions while changing newborn diapers and trying to keep another toddler entertained. Multitasking works except when it doesn’t.

    To redeem myself a bit, and especially for other readers thinking about investing over time, check slides 4 and 9 in the actuarial presentation on the GET site: http://osa.leg.wa.gov/Actuarial_Services/Publications/PDF_Docs/Presentations/GET-Analysis6-28-12.pdf

    It shows an estimate of future tuition increases and Unit Prices. As with any forecast, longer out, there is more uncertainty, but it provides a directional indicator.

  68. rlucas says:

    CS, hah, too funny. I have experienced the neonatal brain drain, and it’s real.

    Great find on the actuarial analysis. The last one such analysis I remember dredging up was from quite some time ago, 2004 if I recall, and it projected a rather dire set of outcomes given the structure and expectations at the time (like, a ~50% chance of the fund failing). This one looks a lot more reasonable.

    The fascinating thing to me is the actuarial projection of unit usage leaping from 784k (2011) to 959k (2012) to 1,375k (2013) (!!!). All that, while the buyin numbers go down. Seems weird.

    I wouldn’t be surprised if there was a decision to “take a bath” during the 2012-2029 projections by projecting greater usage and lesser buyin (by unit volume, not $), thereby stressing the cash flows. The reason you’d do that is that if you are naively graphing it out, you can make the lines appear to cross in 2032, which means, if you stop there, the program looks sound eventually.

    But, a couple of things.

    #1 Pushing projected unit usage forward (earlier) tends to increase plan funded status, because as we’ve amply covered here, there’s a huge premium to overcome. (In the limiting case of 0 year hold time, that is, buy-in and immediate usage, you’re essentially donating $54 per unit to the fund.) So I find it funny that they ramp up usage projections so high and front-load them, then ramp them down over time.

    #2 The other thing is simply this. Everything else is just noise and volatility besides Page 4:

    Investment Returns (projected): r = 6.32%
    Tuition Growth (long-run): g = 5.5% (after 2017)

    If they’re RIGHT (r > g), then GET is a long-run LOSER for investors (because they could replicate the performance of the fund, themselves), but might be a winner for some parents (that is, if you somehow “know” you’ll fail to invest it sensibly, or you prefer GET’s risks to direct investment risks).

    If they’re WRONG (g > r), then GET is a long-run WINNER for investors (if they hold long enough), but will inevitably be underfunded and need either a bailout (Wall-street style) or to infinitely increase new investment (Ponzi-style). That makes it a LOSER for the people of the state of WA, because it means we’ll have to either tax poor people more on their groceries, or pay teachers and ferryboat captains less, in order to make good on this promise to investors.

    The corollary issue to #2 above is, of course, that the entire reason people consider this program is their fear that g >> r.

  69. Lara Lassila says:

    I can’t believe I almost signed up for GET at $172+ for my two elementary school kids. Thank you, thank you, thank you! May I suggest to families considering alternatives to make sure they have taken advantage of Roth IRAs which are quite flexible in investment options and distribution options, and I believe can be a nice alternative to college savings if not already being used for retirement.

  70. Steve says:

    Best investment I made. Bought 1000 units (two kids) in December 2008 at $76/unit. Watched tuition skyrocket at UW, they both went out of state and I used other funds for the first couple of years as the “value” kept going up, let the investment keep increasing. Used lots of units last year and this year at $117.82, their (California) tuition has been flat since first one enrolled 2011/2012. 55% gain in the first four years, flat since then.

  71. rlucas says:

    Glad to hear it worked out! 55% gain in seven years means 6.46% annualized return.

  72. Rob says:

    If you’re still here, who left their units in GET and who bailed?

    I transferred all my units to New York this winter, in March. Wasn’t going to sit around and take a 15% haircut over 2 years.

    I’m curious how many people refunded, and how many stuck it out (thus far)?

    PS – we had bought in 2007 and 2009.

  73. rlucas says:

    Rob, so far I have left the units in the GET program for my niece. She’s 10 now, so I’m still looking at a ~ 2022-2025 horizon for using any units.

    What a mess this whole thing has become.

    So, what should someone do?

    I think it’s plainly obvious that if you bought in within the “even money refund” cashout window, you should take the even money refund at $163. Absolutely, no questions asked. You basically got a do-over. When you bought at $163 you were, at best, buying $118 today and paying that $45 premium for the privilege of taking tuition+political risk instead of market risk.

    Well, the tuition risk happened big to the downside but the political risk happened big to the upside and it was more than a wash — instead of buying $118 today for $163, you are getting $163 today and the state is letting you off the hook for the $45 you were supposed to be paying. Sheesh. What a nice counterparty.

    Viewed differently, if you DON’T take back the $163, you are choosing to re-invest it into the program going forward, possibly at a cost of $163 / unit (though with what a softie counterparty you’ve got they may reprice you down to whatever the new opening ask price is). But if you hold your own $163 when it reopens, you can choose to buy in at the new opening ask, or not. That option has value.

    If you’re in before that (bought in below $163), you have the choice to take out at $118. Your freebie is that you are not on the hook for any early-withdrawal penalty. You then have the option to buy in, or not, at the new opening ask with your $118 — but you will almost certainly pay more than $118/unit and immediately thereafter not be able to withdraw at par (since there will almost certainly be a substantial premium or bid/ask spread once again). On the other hand, if you leave your $118 in, you’ll lose your option, and you’ll be locked into about 12-18 months of zero return (assuming 0 return for 2015-2017). But assuming you want to continue to be exposed to GET risk (tuition+politics) after that, then you will still have a full unit’s exposure, which you were able to “buy” at $118/unit.

    In the case that you still think that GET should be a part of your allocation because it matches a known future liability (at least it tracks it better than e.g. the stock market), you’re not over-allocated to GET vs. other assets, and you’re in earlier than the even-money refund date, you should leave it in. If you think you’re over-allocated to GET, then this is a godsend and you should cash out right away.

    I’m going to leave it in given the above reasoning. I still think it’s a goofy structure and a weird and distasteful set of risks, and I would never buy into it at the ask going forward given the premium issues. But given that the amount I’m talking is a small minority of the funding for this niece, I’m willing to take a zero return through the rest of 2016 and 2017 in order to have my units thereafter track UW tuition until the usage period, which for me probably is 2024.

    (I’d also be lying if I said that the lack of attractive homes for assets right now plays into my thinking. If I could get a 7-year duration bond at 7% I’d probably just take that in a heartbeat.)

  74. rlucas says:

    Or a 7-year bond at, hell, 3.5%

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