Plans a shield against tuition time bomb
Maybe it’s the stock market. Maybe it’s the Legislature’s eroding support for higher education. Whatever it is, the Washington Guaranteed Education Tuition Program has become the fastest-growing pre-paid tuition program in the United States.
Idaho, which offers a different type of program, also reports hefty enrollment gains.
Both are so-called 529 plans that shield investment earnings from federal income taxes. Plan withdrawals are also tax-exempt as long as the money is used for qualified education expenses such as tuition or room and board.
Washington enrollment has jumped 22 percent in the last year. There are more than 44,000 accounts worth in excess of $470 million. There are slightly more than 10,000 accounts in Idaho worth $49.2 million.
Pre-paid plans like that sold in Washington assure the investor that regardless of future tuition increases at state campuses, a year of education purchased at today’s cost, plus a premium, will cover a year of tuition when a child is ready for college.
Washington breaks the annual tuition bill at its most expensive public university into 100 units. Purchase 100 units, you get a year’s tuition in 2020, or whenever.
This year, Washington State University is the most expensive campus, with tuition and mandatory fees of $5,144. That would seem to dictate a unit price of $51, but GET has priced units that went on sale last week at $61, which means there is a $10 premium per unit. Why?
GET Director Betty Lochner says some of the difference covers administrative costs, some of it the cost of building a reserve for the program. Although the program’s actuary tries to anticipate as best it can the trend in tuition hikes, a projected 6.75 percent increase for the 2002-2003 school year fell far short of the 15.5 percent actually imposed.
The units had already been priced and sold based on the lower figure. Without a reserve, GET might have been forced to turn to the Legislature for money to make up for the shortfall. Washington is one of only six states that backs its program with the full faith and credit of the state treasury.
Another problem: The Washington State Investment Board has managed only a 5.77 percent annual return on the fund since its inception in September 1998. Tuition has increased an average 6.8 percent over that same period.
Makes that guarantee look pretty good, doesn’t it? Whatever the state has earned on units purchased in 1998, they have increased 47 percent in value because that is the cumulative increase in tuition over that period.
Participants in Idaho’s Ideal program have not done so well. Ideal was launched in March 2001, in the middle of the stock market meltdown, and funds invested in any of its three plans have suffered for that timing.
According to SavingforCollege.com LLC, funds invested in the equity option have increased less than 1 percent in value since the start of the program. The guaranteed option has returned an average 3.61 percent, better than the 3 percent guarantee.
Returns on the most popular program, which adjusts fund distribution from equity to more conservative alternatives as the student matures, vary from 2 percent up to more than 4 percent.
Over the same period, fees at the University of Idaho have increased about one-third.
Idaho’s funds are administered by New York-based TAII-CREF, which also runs the plans of 11 other states as well as a private plan.
Joseph Hurley manages savingforcollege.com, and is also the author of “The Best Way to Save for College,” which explains 529 plans.
On a scale of five “caps,” awarded on the basis of investment options, flexibility and tax advantages, he gives Washington only two, Idaho four. He says the scale penalizes pre-pays because they work against applicants for financial aid. The absence of a state income tax in Washington also works against the plan. And the premium included in the cost of a plan like Washington’s makes it a poor investment if the child will be entering college in just a few years.
Idaho rates more highly because of its state income tax and three investment options.
Incidentally, investments in either the Idaho or Washington programs can be used at most out-of-state schools, public or private.
If you have children, or want to help relatives or friends with children, check them out. The tuition bombs are ticking.