Where to Save for College? (Washington GET Credits Upate)

If you are a Washington State resident and actively saving money for college, you’ve probably heard of Washington State’s Guaranteed Education Tuition (GET) program. The GET allows college savers to pre-pay for tuition today at a known cost per year to be used in the future, regardless of how much tuition actually costs in the future. You may recall that, last summer, GET program officials informed the public that they would no longer be accepting new money into the program. For the past year, Washingtonians were left waiting to hear what would happen to the GET program going forward.

We finally have some idea about what’s in store for the Washington residents looking for state-sponsored college savings options. Residents will have two options:

1. The standard GET program is expected reopen sometime in 2017.
2. Around the same time, they will offer a more common variety of 529 savings plan. This is where participants invest dollars across investment options available within the specific state’s plan. Any 529 savings plan is similar in feel and concept to a 401k plan, but the proceeds are used for educational expenses as opposed to retirement living expenses.

It’s interesting to note that many states used to offer GET-style pre-paid 529 plans. Such plans rely on having investment returns greater than the increase of in-state tuition to cover increasing college costs. Unfortunately, as we all know, college tuition has increased steadily, leaving investment returns in the dust. For example, over the 10-year period from 2006 to 2016, the Washington GET program earned a respectable 5.15% return¹, but meanwhile, nationwide tuition increased 32% for a four-year public school².

To cover the shortfall, many pre-paid plans charged new investors excess premiums, which, naturally, decreased the attractiveness and viability of those plans. As a result, more than half of those original pre-paid 529 plans have closed their doors to new investors.

When Washington’s GET was closed to new investors, they offered customers a refund option without the customary fees associated with premature withdrawals. This allowed individuals to move money to more desirable 529 savings plan. Since last September, investors opted to liquidate some 15,000 accounts and remove $310 million from Washington’s GET program.

So, as college savers, what should we do now? Will GET’s new tuition unit pricing and future tuition inflation make the program viable again? How about the new 529 savings plan option—should this be something you seriously explore? These are questions we cannot answer until the details of both programs are released. We anticipate additional information to be released in September.

Here is something to consider in the interim, however: The major benefit to using an in-state college savings plan is that most states with income tax allow college savers to deduct contributions from their taxes. Great! –except in states like Washington, which doesn’t have income tax. Then why stick with your state’s plan? Instead, you should look for the very best plan from all of the options across the country.

There are a handful of truly excellent 529 savings plans available, and I would recommend select one that serves you the best, regardless of what state sponsors it. In theory, Washington could design and offer a stellar alternative to what is currently available, but until that happens, I would stick with a state with proven top-notch plan.

Sources

¹ “Annual Report, GET.” 9/30/2015. http://www.get.wa.gov/sites/default/files/documents/get.annrpt15.pdf

² Table 3, “Average Tuition and Fees and Room and Board (Unweighted) in Current dollars and 2015 Dollars, 1986-87 to 2015-16,” Trends in Higher Education, https://trends.collegeboard.org/college-pricing