GET out or stay in – Washington’s prepaid tuition program wants you to make a choice

GET out or stay in – Washington’s prepaid tuition program wants you to make a choice

Under IRS code section 529, individuals are allowed to save for higher education in a special class of account that grows tax free (if the funds are used for higher education). These plans, which vary from state to state, can be either a pre-paid tuition variety or a straight up investment account. Obviously the difference being who is at risk for the investment results and the potential increases in tuition.

As you may be aware, Washington State had gone with the pre-paid variety. The GET plan (Guaranteed Education Tuition) was created by the state Legislature in 1997, and allows parents to prepay tuition costs with a tax-free fund. It guarantees that 100 units will always be worth one year of tuition and fees at the state’s most expensive public four-year university. The State of Washington assumes the risk of tuition going up. You could use the dollar equivalent of the units to go to any school in the country.

About $2.2 billion is invested in GET, which includes a reserve of nearly $600 million, or 33 percent more than it expects to pay out to its account holders over time. This excess funding is the result of tuition cuts and unforeseen stock market gains.

Two years ago, state lawmakers passed into law a choice to contribute to the savings type of a plan called DreamAhead, with fund choices in stocks and bonds. With this option there is no guarantee that there will be enough to pay for college — the individual investor assumes the risk, but also the possibility of a greater reward if the market does well.

In order to try to spread around the surplus in the GET Fund the Legislature passed a law that allows families who own GET units purchased before July 1, 2015, to roll those over into DreamAhead account and get an incentive for doing so.

Currently, each GET unit has a payout value of $103.86. Starting Aug. 1, as part of the routine annual GET payout increase, each unit will be worth $106.01.

But if you choose to roll units over into DreamAhead, the unit value rises to $143 — nearly 38 percent more than this year’s payout value. The GET office estimates that almost 93 percent of GET units are eligible for the increase incentive.

But there is another option. If you retain units in the GET plan you could receive more units as your share of splitting the surplus. They are calling this “rebasing” the units. Account holders who bought units between fall 2011 and spring 2015 — when the price of GET units was at its peak — will get at least one rebasing adjustment. Once that process is completed, if GET still has 25% more money than it needs to pay off its obligations, everyone who still owns GET units could receive a second rebasing adjustment.

There is a catch (there’s always a catch): GET won’t be able to tell you how many extra units you will get until after the September 12 deadline passes.

So GET account holders have choices to make. They can:

  1. Get out of the GET plan into DreamAhead;
  2. Stay in the GET Plan and get possibly two unit adjustments;
  3. Roll the GET unit value over to another state 529 plan and receive what they contributed, or $117.82 per unit, whichever is greater.

Some financial planners think rolling out of the GET into the DreamAhead is the clear choice — especially for those who bought into the plan between 2011 and 2015 when the per unit cost was between $163 and $172. Those units are well underwater and this is such an immediate improvement it’s hard to say no. Those unit holders have no way of knowing how much their adjustment will be if they stay in but getting an immediate 38% bump up in unit value is a known and compelling thing.

Adding into the thought process: In 2015, the Legislature cut tuition at public universities and limited future rate increases to the average annual percentage-growth rate in the state’s median hourly wage for the previous 14 years. This year, that amounted to a 2.2% tuition increase. That’s one reason GET has such a big surplus. And that has to be considered to compare tuition rates going forward (and thus the increase in value of your GET units) with the potential gains you could make in an investment type account. Also, it matters how much time there is before the money will be spent on tuition and how comfortable you are with investment risk.

So GET unit holders have a choice to make by September 12. We’ve provided a link to the content of a letter that was sent to account holders earlier this month that explains more fully the mechanics of your options.




The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

About The Author

As Vice President and Senior Wealth Advisor, Greg provides financial analysis to high net worth individuals. He is the author of several articles for various publications and nonprofit organizations on estate and financial planning subjects.