Dave Naffziger's Blog

Mint.com ran an interesting post on selecting a 529 plan written by Matthew Amster-Burton a finance-food writer based in WA State. Without surfacing much research, he makes the quick assessment that the Montana 529 CollegeSure CD is a better low-risk investment than the WA GET Plan (and he has even invested in the GET Plan).

I wasn’t too familiar with the Montana CollegeSure CD, so I dug into it a bit. The specifics are:

• For new investors, it returns a minimum return of 2% a year
• Returns a maximum return equivalent to the growth of tuition at the IC500 less 3%.
  • The IC500 is a basket of 500 independent colleges.
  • This rate was 4.28% from 09-10.  It looks like it was roughly 5.5% over the last 5 years
  • Over the life of the index (1983-present), it has grown by an annual rate of 5.9%
• Can be purchased with maturities up to 22 years
• FDIC Insured (the current limit is $250K)

So, over the last 5 years, the plan has returned 2-3% a year to investors.

WA GET bid-ask spread aside, the index of the WA plan (UW Tuition) has been growing at 7% a year. This is not uncommon, College Board data shows college tuition growing faster at public institutions than at private colleges.

The FDIC is a more credit-worthy institution than the state of Washington, and the Montana plan isn’t subject to legislative risk in the way that the GET Plan is.

I personally assess the likelihood of both the plan and state of Washington defaulting to be very low (not as low as the risk of the FDIC defaulting), but still low enough that I consider it a wash. I don’t know how to evaluate legislative risk though - that is something endemic to the WA Plan.

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.