WA State Legislature Reconsiders Cap on Tuition – Impacts on the GET Plan

WA GET Plan (529) by on January 13, 2010 at 9:52 pm

Despite passing legislation in 2007 that limited the growth of in-state tuition, the WA legislature is considering removing this cap. From the Seattle Times article:

Gov. Chris Gregoire urged lawmakers to grant universities “tuition flexibility.” And a UW-backed measure that would give universities tuition-setting authority, within limits, is gaining the support of some key lawmakers. Sen. Derek Kilmer, D-Gig Harbor, who chairs the Higher Education & Workforce Development Committee, said he expects to file a bill this week that would give the state’s six universities the ability to set resident undergraduate tuition rates.

The bill currently being considered limits tuition growth to 14% in any one year and requires that the universities limit their growth to 10% a year.

Obviously this has an impact on the WA Get Program. The 529 plan currently targets investment returns of 7% a year, which corresponds to the prior cap on tuition growth. Since the out-of-state tuition reimbursement is indexed to the growth of in-state tuition, the higher tuition growth rate should translate to higher returns for this guaranteed investment vehicle.

Finaid.org highlights how reduced tuition support by state legislatures is quite common during financial downturns:

During recessions and for a year or two afterward, state governments tend to reduce support for higher education. This translates directly into increases in public college tuition rates. So when other investments are dropping due to a declining stock market, prepaid tuition plans will tend to increase.

The Washington Legislature may be doing just that as they try to close a $2.6B budget shortfall.

Overall, my opinion is that moves like this make the WA GET 529 Plan more attractive, particularly as a component of a diversified college savings strategy.

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.

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License. | Dave Naffziger's BlogDave & Iva Naffziger