Thu February 28, 2013
For Families And Lawmakers, Washington's Tuition Savings Plan Is A Costly Bargain
Halfway through the enrollment season for Washington's Guaranteed Tuition Savings program, the number of new enrollments is lagging compared to the last two years. Consumer confidence in the program is slipping, at least for now, even as state lawmakers express their concerns about the $600 million shortfall in the program.
When Cary and Julie Westerbeck signed their daughter Lana up for Washington’s Guaranteed Education Tuition program, the decision seemed easy.
Seven years ago when Lana was two years old GET units cost $70 apiece. The Westerbecks committed to a plan that would pay for three full years of college tuition for their daughter at that price.
GET units are now $172, more than twice as much as they spend on Lana’s GET plan. Today, the Westerbecks have 2-year-old Leah. It was time to make the commitment for her, but the steep price gave Cary Westerbeck pause.
"We were just shocked at how much less we got for more money," he said.
The Westerbecks did sign a contract to buy GET units for Leah. But the high price took its toll. They will buy 200 units for Leah, enough for only two years of college.
Julie Westerbeck says there’s no second-guessing the value of GET. "You have to get it because it’s still a really good deal," she said. "Because it’s still going to pay for that year, well, for two years for Leah no matter how much the costs go up."
Other families are struggling to meet the high unit price too. Halfway through GET’s enrollment season, the number of new enrollments is lagging compared to the last two years. The average number of units held per family is drifting lower as well, from just over 200 units per family several years ago to just under 200 units per family.
Finding a way to pay for college during a time of double-digit increases in state tuitions can be a major problem for families in any case.
GET Versus Stocks
Washington’s plan is unlike that of other states, which offer families investments in mutual funds.
Here families buy a chunk of tuition ahead of time, instead of investing in the stock market. It means the investment is safe from changes in the markets, and its value is tied to the cost of a college education in the state.
But the price of GET units rises every year, as the state re-estimates how much tuitions are likely to rise. In one recent year, tuition at the University of Washington jumped 20 percent. The price of GET units has gone up even faster.
"I still couldn’t justify the GET," said Jim Carson, father of two preteen girls. He looked at the state plan twice. When his girls were little, he saw that the GET unit price was set much higher than the actual cost of tuition that year.
Since families need 100 units to pay for a year of school, the current $172 unit price means they are paying $17,200 for a single year of college. However the current price of tuition at UW is less than $12,000 a year.
Carson decided GET units cost too much so he put his children’s savings into the stock market. When he looked at GET years later, he had a completely different reaction: "Where did I go so completely wrong?"
By this time, the 2008 stock market crash had hit his children’s savings along with everyone else’s. Like many people before the crash, he had anticipated steady returns from the market.
"The one assumption, I think, was that the market would continue to appreciate at 7 to 8 percent for the long term," Carson said.
Instead, the crash led to a giant recession and huge increases in state tuitions. Carson’s investments recovered but couldn’t keep up. Carson did not react to this information by opening GET accounts for his daughters. In the intervening years, the premium on GET units had risen from around 20 percent higher than actual tuition, to around 40 percent higher.
And his girls were no longer small. That meant they had much less time to allow GET units to grow in value.
Fear Of Insolvency
Betty Lochner, director of the GET program, says parents of teens and preteens do need to think it through if they’re buying units at current-year prices. "The program is really designed for young families with very young children," she said in a telephone interview. "You shouldn’t expect to use it in less than five years at this point and it may get a little bit longer."
Lawmakers in Olympia have been pointing out other flaws in the GET program. They’ve been concerned about GET’s $600 million funding gap and worrying about what would happen if they ever had to come up with the money to cover it in a hurry.
"If the perfect storm happened several times over and the worse came to worst, the Legislature would have to come in and make an appropriation," said Lochner. "And that’s what you’re hearing about in the Legislature when they’re concerned about the program."
The fear of insolvency, or of taking drastic measures to fix insolvency, limits the state’s options. Every time the state raises tuition, it raises the payout value of GET units, which claws money out of state hands and gives it to parents. The state can ill afford to reward parents with great returns on GET shares bought when children were young, while it struggles to pay for higher education.
The state cannot even raise tuition selectively – for example, by raising tuition for a UW engineering degree while keeping all other tuitions the same. The highest undergraduate public tuition in Washington is the one that sets GET payout prices. If UW raises the cost of engineering degree, then that new higher tuition sets the payout value for all GET units cashed that year – even those paying for arts degrees. This is GET’s value guarantee, giving good value for parents but working against the state and its attempts to fund higher education.
Cary Westerbeck says he’s holding tight to that guarantee. "Though I feel like our younger daughter’s price is really high, it might look fantastic in 10 years. If the program’s still around."