As a satisfied investor in Washington’s Guaranteed Education Trust (GET), our state’s popular pre-paid college tuition program, I’ve got a couple of thoughts on legislative proposals to change the program in the face of growing liabilities.
Lawmakers are concerned that GET, already underfunded, could become a liability if college-tuition costs outpace the state’s ability to make money on its GET investments. The state takes GET purchases and invests the money, much as it does with a pension fund.
According to a state report released June 30, if everyone who owns GET credits tried to cash them in at the same time, the state would be able to pay only 86 percent of benefits.
First, it is important to point out that GET’s 86 percent asset to liability ratio is not the result of poor performance on the part of fund managers. The liability is mostly due to the fact that the cost of tuition is inflating at a far higher rate than was ever projected, and in fact, a far higher rate than any fund manager could be expected to safely return. Just two years ago the asset to liability ratio was a healthy 117 percent, but with tuition rising at 14 percent per annum, it is hard for GET to keep pace.
Indeed, the irony is that the very liability that state lawmakers fear, is the direct result of their own disinvestment in higher education and the skyrocketing tuition this has created. So for lawmakers to pretend that this problem is anything but their own creation would be disingenuous.
As for proposals to address GET’s deteriorating finances, well, one could just go back to funding higher education at an adequate level where tuition would inflate at a more typical and manageable 6 percent annually on average. But, I know, that’s Cloud Cuckoo Land or something, so let’s not get sidetracked.
One proposal that’s been bandied about would change GET from guaranteeing tuition credit to guaranteeing a specific rate of return, to which I say: What’s the point? At the time we purchased our daughter four years of state tuition, most financial advisors suggested that the projected six percent annual return was way too conservative, but it was the guaranteed nature of the program that proved the big attraction. Worst comes to worst, no matter what tragedy might befall our family, our daughter has four years of tuition and fees fully paid… guaranteed by the state. That’s a peace of mind that’s hard to quantify, and one that should be preserved.
The proposal that appears to be gaining the most strength is one that would close GET to new investors, and replace it with a GET 2 program that would promise a lower return: tuition and fees equal to that of the average at our state’s four-year universities, rather than at the most expensive one. But again… what’s the point?
Either proposal would rebalance the program to deal with new investors, but neither does anything to reduce the state’s exposure to liability owed to existing investors like me, who who bought into the program when credits were relatively cheap, before the state abdicated on its responsible to fund higher education. My daughter gets her four years of UW/WSU tuition no matter what the legislature does. That’s what “guaranteed” means.”
So I say we should just stick with what we have, and let the fund’s actuaries reprice the cost of buying into the program to reflect the new reality of annual double-digit tuition inflation
But that would make sense.
Maybe they should stop wasting scarce tax dollars on unused roads in eastern WA, insane tunnels in Seattle, failed Drug Wars on MJ, and go after the Big Dollars that are online sales that are supposed to be paying local, county, fire district, school district, and state sales taxes but aren’t.
And the ever-increasing tax exemptions for corporations.
By the way, Ireland’s being forced by the ECB to raise their corporate tax rate and rescind the tax exemption for MSFT, cause you can’t plug a sinking ship by poking more holes in it.
Guaranteed by the state? You mean like those worthless contracts that public workers unions sign with the states? You mean like state pensions? Guaranteed?
When you pay this money out for a baby, that gives Republicans two decades worth of chances to take over in Olympia and renege on the deal. Apparently all it takes is a Republican Governor to declare an emergency and tear up every promise the state has made.
As long as a 50%, sometimes more, of Washington’s voters are bumfuck country ignoramuses, the state can’t guarantee doodly squat to anybody.
You could try to enlighten those bumfuck country rubes, with things like GET, but preventing enlightenment is why the GOP exists in the first place. Check and mate, my friend.
damn, but TWH nailed it @3 for the Seattle Saves, Whiners Spend Like Fish win.
As it is now, is it still worth buyng into for lower income familes w/ a child less than a decade away from being college age?
Hear hear, Goldie.
The GET is, and never was, the best option for a 529 plan. It’s a “prepaid/guaranteed savings plan” so it feels very secure, but it’s not very flexible and it doesn’t attract investors from outside Washington. Any of the numerous 529 basic “savings plan” options is probably a better idea (even if they are slightly riskier) because they’re more flexible, more easily portable, and have tended to perform better than GET and GET-like plans do. (The ten best-performing 529 plans over the past five years are all “savings plans,” and none is a GET-type “prepaid/guaranteed savings” plan.)
Although the GET is portable (with restrictions), it has the effect of steering your kid to attend a Washington school. Except I have no idea where my kid and I will be living in umpteen years or where my kid will want to go to school: a Maryland community college? UC Davis? Brown? Missoula College of Beauty? Who knows. GET just doesn’t make as much sense given the unknowns.
My other reservation about GET is that the UW, WSU, and other state schools are slowly being driven into the ground by the legislature, and in twenty years I doubt very much they will be the relatively highly ranked schools they are now.
What the legislature should do is close GET, grandfather in existing accountholders, and then open a new FlexPlan that is a simple savings plan with competitive fees and flexible terms, which will invite investment from outside the state. If they also want us to send our kids to school here, then let them fund higher education appropriately so Washington schools remain a appealing option.
I looked into GET and it sounded like a good idea, but I was really uncomfortable with the paying in for, well, what exactly? It seemed uncomfortably close to getting paid in script instead of cash. A 2 tiered system? Not a good idea.
@5 yes. Wish I had.
I’d just buy the first two years just in case, and do it in your own name, since then you can use it for yourself, your spouse, or any kids.
I opened a GET account for my kid last year, but it seems like a Catch-22. I can’t afford to outlay much more than 15-20 “credits” per year, but then the cost per credit grows leaps and bounds annually as well so it’s a game of diminishing returns as time goes on. Not to mention that college tuition is starting to look like a bubble more and more, so that say 5-10 years from now a whole bunch of people with lots of skin in the game will be left holding a bag of overvalued credits should the bubble burst and prices decline.
@7,
Well, I’m getting 14% annual appreciation at the moment, and will likely average 11-plus-percent annually over the life of the investment. Those are stock market returns without the risk. So while I fully understand all the reasons why a prepaid tuition plan is supposedly a conservative investment, it turned out well for us in WA at this particular point in time.
To cover the difference between expected tutition increases and expected investment returns, GET charges a load fee. Right now, for example, you pay $117 for an $86 unit, or a 26% load fee.
If GET continues to keep pace with the highest tuition, the load fee will be higher than it would be if GET just keeps pace with the average tuition. Buyers will be getting a higher return, but they will be paying proportionately more for it.
The typical student attends the average school, and under the legislature’s proposal their family would only have to pay GET enough to fund that typical situation. Under Goldy’s proposal, the typical student’s family would have to overpay if they wanted to participate in GET.
Of course, they are getting something for that extra payment: their payment will cover tuition if their child gets into the best state school. Since the most parents thinks their children are geniuses, maybe most parents want this. But it it’s not clear that forcing even more clear-eyed parents to pay for a guarantee they will likely not need is the better policy.
@12,
You get the money out either way. If you go to a cheaper school, you can put the extra GET money toward books, room, board etc.
@3 Yep.
One of the things that may keep me back from the UW is tuition, your daughter is lucky. If I had that kind of piece of mind I’d quit my job tomorrow and focus on my future. Now I have to find some way to juggle work and school knowing full well the state will likely laugh at me for being rich and make me pay for school myself. I already made the mistake once of going into debt once, I refuse to make such a mistake again, but I don’t feel like this world is giving me a lot of options. Debt is slavery, and it shouldn’t be forced on anyone. With this job market? I’m not taking the risk that I won’t find work, hell, I don’t even know if finding work is going to be my thing. I want as far away from this mess as possible, politicians are only going to care about themselves, I hope your GET contract is iron clad.
@5, a truly low-income family can’t afford to pay into a GET. That family’s lucky to be able to afford rent.
The GET isn’t an entitlement program; it’s not a guarantee that if you need it, you can get it (i.e., that it’s affordable). When it was first offered, the world was a lot different, in just about every way. Complaining about the program changing is like complaining that the company you retired from isn’t going to keep you in its health insurance group anymore. Yes, it will be difficult; no, it’s not illegal and complaints won’t do any good.
As far as tuition rising, nobody promised you it wouldn’t. Higher ed comes from the same pot that social services does. The pot is pretty much empty.
What’s the public benefit of this program? Kids of wealthy parents don’t have enough advantages without it?
The use of Washington’s higher education system as a cash machine in bad budget times is morally reprehensible. It isn’t good for undergraduate education, university employees and Washington’s long-term economic health.
raku @17,
Now I’m being accused of being wealthy?
Am I missing something or is their argument kind of stupid? “if everyone who owns GET credits tried to cash them in at the same time, the state would be able to pay only 86 percent of benefits.” Yes, but everybody isn’t going to cash them in at the same time. Some people’s children are 18, some are 12. Isn’t this kind of the point? The payout is staggered. Social Security would be broke tomorrow if everybody cashed in at the same time but we won’t, we’ll all cash in at different times, staggered over decades.
Hey Goldy, isn’t this the flipside of your longtime pet cause “High Tuition/High Financial Aid?” Your GET account would be able to pay for plenty of credits if credits were still cheap!