What makes the WA 529 Plan different from other state plans?

WA GET Plan (529) by on February 15, 2009 at 9:36 pm

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).

Tuition in Year 0$76
Purchase Price$101
YearUnit ValueValue of 500 unitsROI
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.

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