A college savings plan in crisis

It may be time to get out of Dodge. Everything is not okay in Washington state’s prepaid college savings plan.

For years families across America have turned to 529 and other college savings plans as a way to tackle the expense of college. Save now so you can afford it later. Thousands of people in Washington state have similarly taken advantage of the state’s GET (Guaranteed Education Tuition) program. You pre-pay for tomorrow’s tuition at slightly higher than today’s prices. But, as the idea goes, for far less than you would pay in the future. What a deal, right? And it was — until now. Seventeen years after its inception, that deal has soured.

Washington’s GET program began with a reasonable premise: The cost of college tuition is rising.

Prepaying future tuition at a little more than today’s price means 100 units of GET buys one year of undergraduate tuition and state mandated fees at the state’s highest priced public university.

This is not a bad deal as long as tuition keeps increasing, which historically it has. College tuition has handily outpaced inflation for years. Who can argue with pre-paying tuition today knowing that down the road that cost of tuition could potentially nearly double? Pay in less. Get more out. As long as you hold the units for a while, allowing time to increase in value, it’s a no brainer.

However, in 2015, Washington state lawmakers decided to do something about the increasingly burdensome cost of education and the resulting student debt. In a rare move, the legislature cut tuition for state public universities by 15–20 percent over the next two years. That set the per-unit GET payout amount at $117.82, effective September 2, 2015. It will be frozen at that amount for the next two years. As GET program director Betty Lochner’s September 17, 2015 letter to GET investors states, “Beginning in the 2017–18 academic year, annual tuition increases may be no more than the state’s average annual growth in median hourly wage.” Unfortunately, tuition costs have historically far outpaced wage growth. Therefore, for GET investors with younger children who are contemplating using these monies to fund tuition at out-of-state schools, the viability of the GET program is now clearly in doubt.

Compare $117.82 per unit payout to $168 or $172 — what families have paid per unit in or after 2010. Remarkably, people purchasing GET units at these prices have now actually lost money by prepaying tuition. They paid more for tuition that now costs less. This plane will not fly and the state knows it. Consequently, they have decided that all GET account holders can withdraw their money penalty-free through December 15, 2016.

Now what?

For all GET account holders, the pressing question is, “Now what?” Do you withdraw your money? Move it to another 529 plan? Answering the following questions should help you think this through.

• How much did you pay for your GET units?
• How many years until your child starts college?
• How risk tolerant (or not) are you?
• What’s the likelihood of your child attending school outside Washington?

(Note: There are two kinds of “529” plans: “Prepaid” ones, like Washington’s GET, which require in-state residency, and “savings” plans, which are offered by most states and usually open to residents of all states. Just to be clear, when we mention “529 plan” here, we mean the “savings” plans, the type offered by most other states, not GET. The 529 plans typically allow you to invest in mutual funds. That means you have a potential for earning higher investment returns but with higher risks and without guarantees.)

If you paid more than the current payout of $117.82

If you bought GET units in or after 2010, the unit price would have been $163 or $172 — which is more than today’s tuition. With lowered tuition costs set for a two-year period, your investment is guaranteed no growth for at least two years, and it might even take several more years to break even.

It’s pretty clear that withdrawing your money and reinvesting it is your best option. Plus, since your purchase price is higher than the tuition — that is, you lost money — you will owe no income tax or IRS penalties when you withdraw your money. Now to decide where.

If your child is a year or two away from starting college, you would avoid losing principal by putting your money in conservative places like savings, money markets or CDs, or rolling the monies to another 529 plan that offers “no-risk” investment options, like Utah’s highly regarded Utah Educational Savings Plan.

However, if your child has at least three years before starting college, consider rolling monies in a 529 savings plan. Conveniently, there are often “target date funds” available that allocate portfolios based on the number of years remaining until college, which takes much of the stress out of having to adjust the asset allocation (and risk) of these accounts as your children approach college.

If you paid less than the current payout of $117.82

If you bought GET units below $117.82 — that is, if you brought them before 2010 — your options depend largely on when your child will start college. Just remember, if you take a withdrawal that isn’t for qualified college costs, any gains will be taxable. You will want to roll the money into a 529 plan to avoid owing tax and a 10% IRS penalty.

If your child is only a year or two away from starting college, it might be best to keep the money where it is. True, you are guaranteed no gain for the next two years, but at least you won’t lose money. If you take a withdrawal (to move it to savings), you will owe tax and penalty on the gain. You can avoid tax and penalty by rolling it over to a 529 savings plan instead where you will also have a potential for earning some investment return. However, by rolling it over to a 529 plan, you are exchanging the safety of not losing principal with a potential investment return. With such a short time horizon, you might opt for safety over a small potential return.

If your child has three or more years to go before starting college, it might make sense to roll the money into another 529 plan, where it has potential to grow.

However, even with a longer time horizon, if you are uncomfortable with risk you might still consider leaving the money in GET. Remember, GET was attractive in the first place because it allowed you to prepay tuition. It didn’t matter how high the tuition would be in the future. To put it in perspective, if you bought GET units seven or nine or even 12 years ago, with all those tuition hikes every year you would have earned a healthy “rate of return” — or at least a positive return. In contrast, with a 529 savings plan you get to control your investment and potentially earn higher returns, but then you bear the risk of losses too. With the GET slated to not increase payouts now until at least 2017, you may consider the next two years as “loss” or flat years. You won’t make money, but your balance won’t go down either. Since we do expect some hourly wage growth in coming years, in all likelihood, in the end you will have a net gain — although it may not be overly competitive.

If you paid less than the current payout of $117.82 and your child attends school outside of Washington state

Finally, if it is likely that your child will attend an out-of-state college, it could be best to move your money to a 529 savings plan (vs. the prepaid plan like GET) and invest in options consistent with your time horizon and ability to bear risk. Washington tuition may stay flat for a while, but that doesn’t mean other states will do the same. In fact, they probably won’t. Putting your money in a 529 plan will give it the best chance to grow.

You can visit www.get.wa.gov for more information or call the GET program folks at (800) 955–2318.

Originally published on November 19, 2015.

Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.