What makes the WA 529 Plan different from other state plans?
There are certainly a ton of details that may differ from other plans, however the major components are:
- Pre-paid plan. You buy college tuition at today’s prices. 18 states offer pre-paid plans.
- Backed by the full faith and credit of the state of Washington. Of the 18 pre-paid plans, only 6 are still open for new investors and backed by their sponsoring state (MA, MD, VA, FL, MS, WA).
- Can be used for out-of-state tuition at ‘full value’. Washington’s GET plan can be used for out of state tuition. The conversion for out-of-state tuition is linked to the tuition of the highest costing in-state university (UW). This is unique among the state-backed plans. In other states the out-of-state tuition is linked to less-favorable metrics: the Consumer Price Index (MA), average money-market rates (VA) or the weighted average cost of tuition (MD, MS).
The combination of these features which (in my opinion) contribute to the plan’s attractiveness. The full-value conversion is perhaps the most essential element. Consider that UW tuition is capped by the legislature at 7% annual growth, despite lobbying by UW to have the caps removed so that they could raise tuition in line with expenses (faster than 7% a year).
There aren’t too many places where you can find a tax-free limited risk return of 7% (of course the return isn’t actually 7%).
Impact of the Unit Premium on Long-Term Returns
In 2009, the Purchase Price of a unit increased from $76 to $101 - a whopping 32.9% increase. This changed the calculus significantly for investors. I wanted to calculate the investment return rate given the discount rate.
I assumed that every year, UW would grow tuition at the maximum rate allowed by the state legislature (7%). As you can see, over the full life of the investment, the rate only equates to 5.6% (5.3% for withdrawals at Age 18).
| Rate | 7% | ||
| Tuition in Year 0 | $76 | ||
| Purchase Price | $101 | ||
| Year | Unit Value | Value of 500 units | ROI |
| 1 | $81.3 | $40,660 | -19.5% |
| 2 | $87.0 | $43,506 | -7.2% |
| 3 | $93.1 | $46,552 | -2.7% |
| 4 | $99.6 | $49,810 | -0.3% |
| 5 | $106.6 | $53,297 | 1.1% |
| 6 | $114.1 | $57,028 | 2.0% |
| 7 | $122.0 | $61,020 | 2.7% |
| 8 | $130.6 | $65,291 | 3.3% |
| 9 | $139.7 | $69,861 | 3.7% |
| 10 | $149.5 | $74,752 | 4.0% |
| 11 | $160.0 | $79,984 | 4.3% |
| 12 | $171.2 | $85,583 | 4.5% |
| 13 | $183.1 | $91,574 | 4.7% |
| 14 | $196.0 | $97,984 | 4.8% |
| 15 | $209.7 | $104,843 | 5.0% |
| 16 | $224.4 | $112,182 | 5.1% |
| 17 | $240.1 | $120,035 | 5.2% |
| 18 | $256.9 | $128,437 | 5.3% |
| 19 | $274.9 | $137,428 | 5.4% |
| 20 | $294.1 | $147,048 | 5.5% |
| 21 | $314.7 | $157,341 | 5.6% |
If you use the 5.25% risk-free return from the excellent analysis Randall Lucas did of the bid-ask spread back in 2006, the WA GET Plan hardly looks like a deal. Even if you use the 20-year t-bill yield of 4.07% (as of 11/27/09), the returns don’t look that attractive.
