The Seattle Times published an article Sept. 6 reviewing changes to the Washington Guaranteed Education Tuition program and how participants might want to respond.
Gary Brooks provided commentary that was featured in the primary article that ran in the paper and online.
The full text of Gary’s reply to Times reporter Katherine Long was included, along with comments from other advisors, in the online edition only.
Those comments are included here as well:
Certified financial planner with Brooks, Hughes & Jones Wealth Advisors, an independent registered investment adviser in Tacoma who provides financial planning and investment management to families and nonprofits throughout Puget Sound.
“I’ve been a proponent of GET for a long time and remained one even through the payout freeze over the past few years — as long as you were investing while the child was very young. But the state legislature’s decision has defeated the purpose of this program for many participants.
“If you expect to use GET units for this school year or next, it may make sense to stay in the program simply because there isn’t enough time to gain much by moving to a different option. People who have paid $172 per unit over the past few years paid a 46% premium over the current $117.82 payout value. Because tuition is declining below that payout value, there will be some gain between the $117.82/unit payout and the actual cost of tuition at Washington state colleges but not nearly enough difference to make up for the large premium that was paid.
“And if you were an early investor who experienced good returns up until 2012-13 when the payout value was first frozen, you may be happy enough with that return even if there is no prospect for growth in payout value for several more years. This particularly applies if you are entirely risk averse and certain that your child will attend a Washington state public college.
“However, I think it will make sense for most people to request a full refund. In this case, I recommend moving redeemed GET proceeds to the Vanguard 529 affiliated with the state of Nevada. It is low cost with solid investment choices. There is no need to buy a more expensive broker-sold 529 option. And the affiliation with Nevada is not a problem for Washington residents. We can participate in any other state’s plan because there is not a Washington 529 savings plan and we don’t have a state income tax so there is no tax deduction for contributions that would apply anyway.
“While the lowering of tuition is a good thing for many people, GET participants – mostly those who have purchased units since 2011-12 – have been financially harmed by the legislature’s decision. They’ve suffered an opportunity cost by having purchased GET units instead of putting the same amount of money into a 529 savings plan.
“I assume that the payout value will stay at $117.82 for at least five more years, possibly longer. The next two years of lower tuition are in place. After that, if we assume that tuition starts to rise again based on the wage growth calculations that have been proposed, it still likely takes at least a few years to get back to the tuition rate from the 2014-15 school year before the 15% decrease. If you sit in GET for another 5 years with no return, that’s a potentially large opportunity cost.
“This opportunity cost is most significant for students who don’t intend to use the units to attend Washington state public colleges. If they go out of state or to a private school where costs are still rising, they fall farther behind. They’ve already had three years of no growth in payout value.
“It seems clear to me that anyone who paid more than the current frozen payout value should take the full refund of their contribution and rollover to a 529 savings account. But even someone who was an early GET investor may want to as well. A personal example: I bought units for my daughter in 2002 at $52 per unit. She is currently entering 8th grade. The current payout value/redemption value of $117.82 represents a 126.6% return on our investment over 13 years, a little less than 10% annualized. If we wait until her freshman year of college and the payout value is still at $117.82, which seems probable, the annual return on that investment is down to 7%. Alternatively, I could move that move to her existing 529 savings plan and capture more tax-free growth over the next five years. Even if it is invested very conservatively and doesn’t generate much more return it will likely be beneficial compared to staying in GET.
“For comparison sake: While GET payout value has been frozen the past three years, the Vanguard Moderate Age-Based Portfolio for 11- to 15-year-olds gained 3.87% per year over the past three years ended August 31. That’s not anything to get excited about since tuition inflation surpasses that nationally, but it’s a lot more progress than GET has provided. (Of course, it’s important to note that in 529 savings accounts that there is investment risk and no guarantee of growth.)
“It’s best to make this change as soon as possible. The 16-month window the state offers to decide is just more time with no return on your investment while tuition climbs almost everywhere outside of the Washington state system. And when making the change, it is important to do it within the 60-day rollover window in order to avoid any tax penalty.”
Brooks offered these other thoughts:
- The tuition decrease will benefit a lot of people, but the legislature has dealt GET administrators an awful hand. They communicate a very positive spin that things will work out OK and that the program is well funded to meet its liabilities. But it seems that this action will eventually lead to permanent closure of the GET program. There are too many unknowns to participate. Significant redemption requests could also make it difficult for the state investment board to manage the portfolio for a time, possibly sacrificing some return.
• Another option GET should consider is allowing the use of more than 125 units in a year. If a student goes to a private college this year and could use more units to cover the higher costs, they should be allowed to, rather than be forced to wait while receiving no growth in the payout value.
• Even if the state expedites the process of establishing a 529 savings plan here, it will take a long time. It will have to find an investment manager to run the program. The due diligence process to find the manager is lengthy.
• GET was never meant to cover more than in-state public school tuition. Even if a student went to a state school, there are other substantial costs to cover. There needs to be some form of savings or financial aid beyond GET. People with the means and desire should have been contributing to a 529 savings plan in addition to GET anyway.
• What are the other ramifications of lower tuition? It seems logical that this could reduce the quality of education. Lower tuition means lower budgets for universities and therefore reduces their ability to compete for the top educators and their ability to support programs, research, etc.
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