The program:
What I'd seen online and heard from friends indicated the GET program allows you to lock in tuition at today's rates. Given tuition rates climb like an enthusiastic child up a tree, a lock-in option would be an appealing deal.
Most people are drawn into buying a GET credit to avoid tuition increases that average 7-8%. I did a little researching and the confirmed the historical rate increases at UW for the last 10 years.
Sounded like a great deal for families. I emailed my friend and indicated it sounded good, would encourage a positive outcome (college) for their kid, and help the child not start his worklife with a huge debt burden.
Geez- that was a mistake...
A few hours later, I wondered if I might have missed something. "A guaranteed 8% rate of return from the government... That seems too good to be true." I went back and scanned the GET website closer and found a sub-page that includes the information:
"The GET unit price includes a premium over current tuition. Consequently, you should plan to hold your units for at least three years before you can expect to see any real gain."
I hadn't heard anything about "premium" before. After digging all over the website, I couldn't find where it showed how much the premium was anywhere. Not a good sign. I decided to evaluate the actual numbers of the program, including calculate the premium. I have called and verified the below information with GET.
Briefly how Get works:
You buy a "GET unit" which is good for 1/100th's of a year of tuition at the most expensive Washington public university. This means buying 100 GET units pays for a year of tuition at any public university in the state.
The concept of "locking in" doesn't mean you're locking in the price of tuition as most people believe. You're locking in the price of a GET credit. Therein enters the little discussed "premium."
The Premium:
Comparing the cost of tuition at UW and the cost of a 100 GET credits for the same year shows the premium.
$8,122 UW's 2010 tuition rate
$11,700 Tuition paid using GET credits at 2010 rates
11,700/8,122 = 44%
A GET credit is equal to the cost of tuition plus an extra premium of 44%.
The way GET allows you to "lock in" is to start off by charging 44% more. Ouch!
Part Two of the Analysis:
A child's education at a University may be 4 years, which would be 400 GET units.
The 44% premium is the end of the cost increases only if you can make a child's entire college purchase at one time. Not a lot of people can write a check for a years worth of GET units long before it's due, let alone for multiple years.
If you're like about everyone, you'll be using one of the state's options to buy for all those GET credits, which make the picture quite a bit worse than it initially appears with just the "premium."
Enter a payment program with the state. If you finance the entire tuition amount, and "lock-in" the price of a GET credit (not the price of tuition), the state charges you a 7.5% finance fee.
This would seem counter-intuitive. Data shows tuition historically increases at a rate of 7-8% and you're paying 7.5% interest on tuition so you'd think the net effect of this arrangement would be loaning the state money interest free until you pay it off. It's worse than that: You're paying 7.5% on the tuition plus the 44% premium. This makes the total finance charges paid much higher. Your "7.5% interest rate" is really 10.8% of actual tuition costs per year!
What if you save interest charges and want to payoff the GET principal early? It doesn't help: the state will charge you the full interest charges if you pre-pay.
Buy GET credits each year at a new, higher rate. If you don't want to pay 10.8% finance fees, you can choose to make a new lump purchase of GET credits each year.
The catch is you can't "lock in" the price of GET units for future years. From 2009 to 2010, a GET unit cost went up 15.8% (117/101). The cost of GET units have a history of increasing quickly. In a twist of irony, the cost of GET units are rising faster than tuition.
GET Options, In Review:
Using GET to pay for a child's tuition, you have three options:
- Pay cash upfront for a child's entire college tuition with an extra 44% premium; or
- Borrow money and "lock-in": pay an interest rate of 7.5% on both tuition and 44% premium.
- Don't "lock in" and buy in lump amounts: pay for tuition and the premium in cash at the new GET rate, usually 10-15% higher each year.
Final Thoughts:
It is interested the State does not discuss their "premium" on the front page of the website and doesn't help you calculate it at all anywhere on the site. If they showed a simple table explaining the premium with the finance charges, a whole lot less people would probably put their money in the state's GET program. I discuss the math analysis below, unless you're buying 4 years upfront (paying all cash) and your child has more than 10 years to go until graduation, your rate of return is sub 2.5% - ie, you're better off to buy a CD.
While I fail to see the financial logic in GET for almost all low to middle income parents, I do see the logic of it from the perspective of the state.
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Math...
It's hard to go into the nitty gritty deals when writing something for friends who want the point and not the supporting details. If you hate math, and want to understand just the most important analysis, stop reading. The above will tell you all you need to know.
If you love math and want to see the numbers and analysis, this section is for you.
Interest rate even worse than they appear: Remember that the interest rate charges apply to both tuition and premium, working out to 10.8%. Horrible, but it gets worse. The state's finance charges aren't tax deductible. If you're in a 25% tax bracket, this finance charge rate of 7.5% is like an interest rate of 14.4% on your house. Tuition + premium (1.44) * interest rate (.075) divided by 1 minus tax rate (.75) = 14.4% equivalent tax deductible interest on your house. Bottom-line: I can think of a number of better ways to finance a college education that are better than a pre-tax 14.4%.
Thinking about how things are likely to change: I looked at: http://www.finaid.org/savings/tuition-inflation.phtml. Basically tuition increases about 8% annually right now. Personally, I think that rate will not keep increasing as much over a long period of time with new technology coming online. But it's very likely to outpace inflation in my opinion. If I had a newborn child, I would think 18 years is a long time for the high education playing field to change dramatically. I think we're likely to see it get a lot more efficient in the next two decades with technology.
Other Pros and Cons:
I reviewed the GET program FAQ and a couple of things to note:
1. They can and do increase the prices for GET units each year. Here's a look at the historical increases.
2. Contributions are not tax deductible, but increases in value are not taxed. This overall is a positive (like a Roth IRA vs a Traditional IRA). Problem goes back to that "premium."
3. It's transferable to another "family member" so if someone didn't use it for any reason (used only part for a tech school, got a scholarship, etc) - it's not wasted.
4. It can be used for "other higher education expenses" - books, room and board, etc. That flexibility is really nice.
5. It has a very small impact on qualifying for financial aid (important - which Roth IRAs do not give).
6. Others can contribute: in the event the parents/grandparents/others wants to chip in at some point, there's flexibility there.
What it means as an investment:
It takes about 5-6 years for what you paid in GET to not be less than rack rate tuition costs. If you'd have put the $11,700 GET money in similar investment using a 2.75% rate CD, it takes 10-11 years before the GET program is is a little better than the CD! This is based on assumptions that can change, but are likely to be "in the ball park."
To see the raw numbers, here's the spreadsheet screen.
Basically: Year 10 represents a break even point, above that the rates of return start to climb - but only if you paid cash for everything. If you had to finance, subtract 7.5% from all those numbers and look at the rate of returns again. Negative! Again, the state could easily put information in a table describing the costs of financing 8% rising tuition with a 7.5% interest rate on a 44% extra premium - but they do not.
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Extra writing thoughts:
A 4 year degree is 400 GET credits.
Unless you can purchase 400 GET credits in one check for a total of $46,800 - which you're average family can not - you then must buy GET credits in one of two ways:
1. Make bulk purchases each year. For example, buy 100 credit blocks each year. The problem with this approach is each new year you're paying the new GET credit rate. As descrbied above, this has a history of increasing at a compounded rate of 10%.
2. Paying 7.5% interest.
The single lump payment plan means you write a check for all the GET credits you need, which corresponds to a certain amount of tuition equivalent (1 year = 100 credits = $11,700).
Buying a GET credit means:
Lump payment: Financed Payment: Paying a 7.5% finance charge on a tuition when that was what we were trying to avoid in the first place. It's loaning the government money at 0% interest - except worse. You're paying 7.5% on tuition AND a 44% premium.
If you stop paying on your plan, WHAT HAPPENS?
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After purchasing the GET credits, when it's time for a child to go to college, you redeem the credits to help fund their education.
http://www.hecb.wa.gov/keyfacts/documents/ChapterII-1-5-10.pdf
The national recession dealt Washington’s public higher education institutions a serious blow in 2009. Sharply declining state revenue forced lawmakers to reduce the system’s 2009-11 operating budget to a level significantly below that needed to maintain existing programs. The budget crisis came at a time when the state’s Strategic Master Plan for Higher Education, adopted in 2008, called for increasing degree and certificate production by more than 40 percent annually within a decade to meet projected demand for college graduates.
The budget shortfall was partially offset by authorized tuition increases of up to 14 percent per year for resident undergraduates at public baccalaureate institutions, and 7 percent per year at the community and technical colleges.
