OLYMPIA – The state’s new DreamAhead savings program for education expenses has nearly a billion dollars in it, most of it a result of transfers from accounts in another state plan, the Guaranteed Education Tuition program.
More than a quarter of the accounts in GET were closed this year and the value of units in those accounts transferred to the new program, lawmakers were told recently.
The shift, known as a rollover, came as the state offered incentives to GET participants who were worried about losses in their investments after several years of large tuition raises, followed by a tuition cut then a tuition freeze.
After two years of uncertainty over college programs, the state has gone from one suspended plan to two operating plans.
“It’s a way to give families an additional set of options” Luke Minor, director of the state’s 529 programs, said. The number comes from the federal tax code that allows the programs.
The state suspended the sale of new GET investment units – equal to a share of the cost of a year’s tuition – from 2015 to 2017 because of uncertainty over the future costs of tuition. During that freeze, the Legislature began talking about a separate investment plan that had been shelved years earlier, in part because GET was working so well.
The difference between the programs is similar to the difference between taking out an insurance policy or a setting up a 401(k) to cover future expenses, Minor said.
With GET, a family can purchase units that each represent 1 percent of the cost of a year’s tuition and fees at the state’s most expensive campus. That means 100 units, whether acquired all at once or over time, can be redeemed in the future for a year at UW or WSU. The units can also be used for room and board, and some other education expenses like computers.
Because GET is based on the most expensive public university in the state, 100 GET units go further for tuition and fees at other regional universities and community colleges. Currently 200 GET units, which would cover two years at one of the major research universities, will cover two years at a community college plus two years at Eastern Washington University. They are also redeemable at any public or private college or institution that participates in federal financial aid programs at the current redemption rate, which this year is $106.01 per unit.
The cost and value of a GET unit tracks the sharp rise of student tuition costs in the state. But overall tuition is a function of two factors: what the student pays and what the state subsidizes through tax dollars.
When the program opened in the 1998 state fiscal year, a unit was $35. It rose gradually, between $1 and $10 a year, for the next decade. By 2008 it had slightly more than doubled to $76.
In response to the state budget problems brought on by the recession, the Legislature cut state support of Washington’s public universities, colleges and community colleges, but allowed the institutions to raise the amount they charged students to help make up the difference. By 2012-13, tuition paid by students had risen to the point that a GET unit cost $152.27.
During that time, GET looked like a great investment because it was outperforming the market with returns that were tax-free if used within federal guidelines, Minor said.
“GET was never intended for that,” he said. “It is more like an insurance plan.”
Then came a series of decisions in the Legislature that were great for students in college, but not so good for families who recently purchased GET credits. In 2013, the Legislature froze tuition costs at state colleges and universities. In 2015, it cut tuition between 5 percent and 20 percent, depending on the school, by pumping more money into higher education. For the first time, a GET unit purchased in 2012 was worth less than the redemption rate for a student in or about to enter college.
The state suspended sales of GET units in 2015, although it allowed existing units to be redeemed and agreed to waive some of the fees for amortization and redemption for people who wanted to cash out their accounts.
At the same time as it suspended sales of GET units, the Legislature began looking at establishing the other kind of state-sponsored college funding program allowed under federal law, commonly known as a 529 savings account. DreamAhead, as that program was eventually named, allows a family to invest in certain funds tied to the financial markets, similar to a sponsored 401(k) plan, with the goal of growing the investments tax-free over time when used for qualified education expenses.
With the addition of DreamAhead, Washington joined 48 states and the District of Columbia offering some form of 529 savings account. At one time, 18 states had tuition plans like GET, but seven of those programs were closed because of uncertainty over future costs, and Washington has only one of four remaining tuition plans backed by the full faith and credit of the state.
DreamAhead allows a family to invest based on the year they expect the recipient to enroll in school. They can use a plan that moves their money to more conservative investments as that enrollment year approaches. They can also put money into a portfolio that employs either conservative, moderate or growth strategies, which are tied in part to the amount invested in bonds versus the amount invested in stocks. An experienced investor can also place money in different portfolios and move them around over time.
The 529 savings plan may be easier for some families to understand because so many now have retirement savings plans, Minor said. It proved popular with some GET investors.
When DreamAhead opened in June, investors with GET accounts were given a 90-day period to transfer their units into a savings plan account, and in some cases were given additional units to increase the value of the high-priced units bought in recent years as an incentive.
Some 26,600 GET accounts “rolled over” into DreamAhead accounts, with a total value of $875 million. They represent the vast majority of participants in the new savings plan.
“It gave GET customers on the fence a chance to get a different experience,” Minor said.
The state still has more than 66,000 GET accounts, which tend to be held by families with younger beneficiaries who have more years before they are expected to start college.
After being closed for two years, the state had more than 5,700 new GET enrollments and sold some 822,000 units priced at $113 this year. The units will remain at that price in 2019.
The cost of a purchased unit is different from the redemption price because they are calculated different ways, Minor said. Each year the purchase price is based on an actuarial estimate of future tuition in 10 to 15 years that takes inflation into account. The redemption price is a much simpler: dividing $10,601, the cost of a year of tuition and fees at University of Washington Tacoma by 100. That school has the highest price tag because of some building and activities fees.
The state’s 529 office is still sorting out how many families completely dropped out of GET programs to switch to DreamAhead, Minor said. Some families had more than one GET account, and may have rolled one account over, particularly for students about to enter college, to take advantage of incentives at the start of the savings program, and kept other accounts for younger students in the tuition program.
“It’s an interesting time for us,” he said.
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