The Washington GET Program Analysis

Since I enjoy analyzing financial decisions, a family friend requested my thoughts on the Washington GET program, which allows people to purchase tuition at today's rates for a child to use in the future.

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:

1. Pay cash upfront for a child's entire college tuition with an extra 44% premium; or
2. Borrow money and "lock-in": pay an interest rate of 7.5% on both tuition and 44% premium.
3. 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.

Least Expensive Unlimited Cell Phone Plans

UNI Cell: 
Costs
$60 Unlimited Voice/Text/Data Plan
$65 With tax


Actual Network Carrier:  AT&T.  For example, sending a text message via email: "To send a text message to another UNI^SM Wireless customer from email, place your friend's 10-digit UNI^SM Wireless phone number followed by @txt.att.net in the "To" or address field."  I also spoke with their customer service and asked the same question, they also indicated AT&T was the carrier.


Questions:  Visual voicemail?  iPhone 3g or 2g.  Access to the full AT&T network?  Any other network? Roaming?  Same map as AT&T?  


iPhone compatibility:   Article referencing iPhone on UniCell

Contact: 425-697-4886 M-F 9am-6pm PST

SIMPLE Mobile  Coverage Map
Costs:
$40 3g Unlimited Voice/Text Data Plan (4G is $60/month)
$44 With tax

Iphone compatibility: No.

Actual Network Carrier:  T-Mobile.  When programming the MMS features on the iPhone settings, the support notes references: "MMSC: http://smpl.mms.msg.eng.t-mobile.com/mms/wapenc"


Questions:  Visual voicemail? iPhone 3g or 2g?  Access to the full T-mobile network?  Any other network?  Roaming?  


Boost Mobile




Actual Network Carrier:  Sprint.  Unlike other providers which were difficult to find carrier information on, Boost Mobile has a WikiArticle describing it's entire pre-paid business model with Sprint.

Can you increase your IQ? The experiment results

I recently read an article by bio-hacker and investor Andrew Clark that stated he had raised his IQ more than 18 points using a program based on new research covered by the WSJ  and NYT called "dual N back" training.  Doing 20 minutes a day of this kind of training increases IQ scores 10-20 points in 20 days.  That level of increase is a full standard deviation.  In non-statistical terms, it's a life changing increase in intelligence.  It's going from average high school graduate (105) to college graduate (115), or if you're an average college graduate  (115) to average doctor (130).  10-15 points opens different doors.

This is a big deal since I -- and all the scientific research I had read about a decade ago since reading the Bell Curve -- believed that after early childhood IQ is substantially fixed.

I read more about the product it was based on and its money back guarantee   After you buy the product, they give you one of two reputable IQ tests to take.  After establishing your baseline IQ, you then do the program for 20 days, and take the other IQ test.  If your increase is less than 10 points, you get your money back.

I found another Dutch bio-hacker who did the same thing but only got 8 points of growth (which is enormous) and requested his money back.  If I get 8 points, that is still nearly life changing, and I get my money back. :)

Based on many standardized tests, my IQ hasn't moved my whole life and this is a relatively low risk, low time, low cost, medium energy commitment test to see if I can change that.

As a side note:  I took both IQ tests because I was skeptical of their reliability.  I was within a single percentile point.  Incredibly accurate.

Going Forward:  So I've decided to see how well I do with this program.  Regardless of how well I do (including epic fail and no intelligence increase), I'll post the results.

Update #1:  Noticed some tentative patterns having started emerging.  There is a significant difference between doing it when I'm tired and doing it when I just wake up from sleep/nap.  I perform much better right after waking.  Also noticed crazy dreams if it is the last thing I do before sleep.

Update #2: Two other associates have started the training.  We are starting at 3 different IQ points spaced approximately 10 points apart.  Both associates have also noticed dreams increase significantly, consistent with what others have noted on increased REM sleep.  Dreams are both weird and more intense.

Update #3: At session 8.  Already noticing that I can recall addresses and numbers related to my work in a way I couldn't before.  Experimenting with breaking 20 sessions into 2 sessions of 10.  My scores are rising quickly since although it's too early to correlate the two.

Resources:
Original research, including criticism summary.  Example of someone who gained almost nothing but impressive working memory increase.

How to Avoid Cell Phone Taxes: Save an instant 16% on your monthly cell bill

How Expensive Are Washington Cell Phone Taxes?
Washington charges 23% on top of everyone's cell phone bill!  ( Washington is 2nd worst in the nation)  Compare 23% that with residents of Oregon (6.5%) or Nevada (7%) and you start realize Washington is taxing cell phones like cigarettes.

Understanding How AT&T Determines What Tax Rate Your Bill Gets
A Forbes article explains that cell phone companies determine what tax to apply to your account based on the "billing address."  For example, you live in Washington, you have your bill sent to your home, you get Washington State's 23% cell tax.  If you live in Las Vegas, you have your bill sent to your Vegas home, you get taxed at Nevada's 7% cell rate.

But What If....
You live in Washington, but have Las Vegas, Nevada as your billing address.  You get Nevada's 7% cell tax.  If you don't know someone in Vegas, just turn on paperless billing on your account.

To recap:  Saving 16% today
By changing your billing address to a dummy address in Vegas, and enabling paperless billing two things will happen instantly:
1  You'll start receiving all your bills via your email account.
2.  Your bill will be charged Nevada tax rates and you'll save 16% off your cell phone bill (which could be a lot of money if you have a family or business plan)

It took me only a few minutes online to find the right spot to change it (It can be a dummy address; the zip code has to match up with the address)

I'm currently spending $316 a year in cell taxes alone as a single user!  This will reduce it to $96, saving me $220 a year -- enough to buy a new iPhone.  Every year.

Calculating The Savings in 7 seconds
Take your current total bill (with taxes) and multiply it by 1.56 and that's what you'll save each year going forward in taxes!

What does it cost to leave a light bulb on all night?

Wonder what it costs to leave a light on all night? How much money is bleeding out of your wallet?

 

I polled 12 college educated friends.  The answers varied widely from $0.10-$5.00/night.  The average was $1.17. It’s nice to be educated. The reality is surprising.  It costs $.03 to leave a light on all night.  Lacking data, best guessers are off by 300%, and most people are unknowingly exaggerating the real cost energy by 3900%.  That’s a problem because it causes people to focus their time trying to save money when they’re really saving pennies instead of dollars.

Here is a very easy to use energy calculator for a variety of home appliances.  In Benton County, WA rates are $.0649 (plug into the calculator).

Interesting data that puts expenses in perspective.  How much electricity does it cost to:

Leave a 60W light on all night? $0.03/night

Run a dryer, full load, on high?  $0.19/load

Leave a 32” TV on all night?     $0.14

--etc--

Bottom-line:  electricity is cheap.  Really cheap.  Much cheaper than people think.  It’s a human tendency to focus on expenses you can see, but ignore the “unseen” expenses.  Things that people see (the hallway light left on at night while they’re lying in bed) “seem” expensive.  For example, leave a light on every night for a year (and it’s unlikely a light will be left of 365 days in a row) will cost $11.  However, most people don’t know what they pay each year for house insurance.  A little shopping around on house insurance could save you $150, or $250 on car insurance.  Another example of a killer unseen expense: Depreciation.  Buy a new car and depreciation could be an average of -$2,400 a year for the first 5 years.  Make that mistake and you might as well leave 20 lights on 24 hours a day for 18 years.  My house barely has more than 20 60watt candecent lights!

Do a little research and make sure you are making data-based decisions.  Over a long period of time it will make a huge financial difference.

Stepping up the electricity awareness another notch:

In some areas, power companies charge up to 4 times more for electricity at different times of the day.  It’s called peak vs non-peak hours.  For example, my friend Janalyne is moving to Las Vegas, Nevada.  Vegas peak time (1pm-7pm) during summer is 4 times more expensive than non-peak times.  (Source)  This means you’re much less expensive to cool off the house at noon than at 1pm, or to dry all the clothes at 7:01pm)

Benton County, WA doesn’t have peak rates.  If you live in another county, to find the cost of electricity, simply call the utility company on your electric bill and ask, “What does electricity cost per kilowatt hours?”  Also ask, “Is there a peak rate?  If so, when are the dates/times peak rates are in effect?”  You now know more real life data about electricity costs than 90% of the population – now you can make decisions on reality instead of an mis-leading sense.  Easy.

Best Cash Back Credit Cards for 2011

If you have good credit, the opportunities this year are quite a bit better than the ones from last year. I recently found & applied for the two best cash back credit cards I've seen available in a long time.


Over 18 months ago Schwab offered a cash back card at 2% for a limited time and the window closed before I could apply.  It does not plan to re-offer the card and I've been hunting for a 2% cash back credit card ever since.  Fidelity is offering two amazing deals, including a 2% cash back card, for an unknown period of time; act accordingly.


(Drum roll) Here are the best cash back credit cards for 2011


American Express Fidelity Rewards: Earn 2% cash on everything.  Requires opening a Fidelity Cash & Brokerage account online here (<3 minutes, no deposit required). Cash back rewards are transferred to the Fidelity account which can be transferred to your checking or automatically invested in an IRA or college savings account.  Be sure to give Fidelity account # to representative if applying by phone.  App.


American Express Costco Business: Earn 4% back on gas up to $6,000, 3% on eating out, 2% on traveling, and 1% on everything else. They send a check out once a year with what you accumulated. App.


American Express Costco Personal: Earn 3% back on gas, 3% on eating out, 2% on traveling and 1% on everything else. They send a check out once a year with what you accumulated. App.


Amex SimplyCash Business: Earn 5% cash back on wireless service and office supplies , 3% on gasoline up $12,000 per year, and 1% on every other purchase. Plus, it is automatically credited to your statement each month. App.



American Express Additonal Benefits:
Extended Warrenty: Extends the term of the original manufacturer's warranty up to one additional year.
Damage/Theft Protection: Protects purchases against accidental damage and theft for up to 90 days from purchase. 
Other Benefits here half way at bottom.

American Express is the best card to use for all new purchases particularly because it extends the warranty for free for a year, which has a lot of value.  For example, extending the iPhone warranty 1 year costs an additional $70; an extended warranty on a new TV or other high end purchase is worth even more money.  A friend recently had the water pump on his hot tub go out;  it was outside the manufacturer's warranty by 1 month.  But it was covered by American Express, who cut him a check for $700.


Since American Express is not accepted at all places, particularly restaurants, there's value in also having a VISA Rewards card.


VISA Fidelity Cash Rewards: Earn 1.5% cash on everything.  Requires first opening a Fidelity Cash & Brokerage account online here (<3 minutes, no deposit required)). Cash back rewards are transferred to the Fidelity account which can be transferred to your checking or automatically invested in an IRA or college savings account.  Be sure to give Fidelity account # to representative if applying by phone.  App.


VISA Bank of America Rewards: 3% gas, 2% restaurants, 1% everything else plus $50 cash bonus. App.


Summary:  The difference between 1% and 1.5%-2% is  is 50%-100% more cash back.  It's the difference between a $500 (at 1%) and a $750 (at 1.5%) or $1,000 (at 2%) for simply using a better card.


Avoid.  Credit cards with "up to" language or that have rotating categories or other strings attached generally are games that lower total cash back at the end of a year.

Debit Cards.  While I strongly dislike debit cards because they are more difficult to deal with in terms of fraud protection and offer less fringe benefits, below is the best cash back debit card available:


Mastercard PerkStreet Debit Card:  2% cash back on everything provided you maintain a $5,000+ balance. Less than $5,000, the reward drops to 1%. App.


These are the best deals I believe are available.  If you're aware of something better, please let me know.

Emergency Funds 201

This is an email I wrote to the author of The Simple Dollar in response to his article detailing an approach I think builds on his idea but I feel is much better.

________________________________________________________

I always enjoy your articles.  You're a good writer, your comments are relatively succinct, and spot on.

So this reaction is the exception.  I want to take issue with a comment in this article that I *strongly* disagree with.

"Also, never, ever have an emergency fund that consists of a credit line"

I think it's extremely prudent to have a line of credit in case something goes wrong.  I'm a fan of cash-like reserves, but the reality is, if you have any debt, instead of having cash sitting earning essentially 0-1% interest, you could be essentially earning that debt interest rate as a rate of return. 

For example, as a self-employed person, I believe strongly in having safety reserves -- I have more ups and downs than an average person.  However, as soon as I make money, I instantly use it to pay down whatever debt I have -- making sure that debt allows me to borrow back against it as soon as I need money again.  Now if the debt is such that it does not allow one to borrow back without fees (credit cards charge 3% fee for borrowing cash -- ick), that wouldn't make sense (and I have none of that debt).  But what I would argue would make more sense is to go to a bank and setup a 5-50k line of credit at 5-7% (very common, very easy to do, usually a 1x charge of $50 to setup).  Have it sitting there as essentially a cash reserve, and then use whatever cash reserves you have to pay off any debt.  This keeps liquidity that's essential for emergencies while optimizing for interest payments.  If your debt is at 5-25%, you're essentially investing your cash reserves at that rate of return, safe, with liquidity to pull it out at any time.  I've used this strategy for 6+ years very effectively.

Playing Devil's Advocate.  The argument against this is what happens if the bank reduces the line of credit (I recommend having an amount higher than you need).  Or what happens if the bank closes the LOC all together (which is why I recommend having a line at more than one bank).  Neither of those situations has happened, but they're possible, and it's wise to have thought through and prepared for what can go wrong.  Obviously, another problem is what if the person is unable to control their spending (not a problem I have), then this solution would not apply to them.  This is designed for people who are not irresponsible.

Based on how I see it this solution of having a line of credit at a bank is inexpensive to create (usually $50-$150 one-time setup fee), offers much more safety than pure cash reserves (instead of 3-5k available for emergency, there's 5-50k), all your money is working for you at credit card interest rates instead of losing 3% in net inflation.

For a reader who has some basic credit card debt, and could get a simple LOC at a bank, your cash-only reserve solution is essentially costing readers 10-25% a year unnecessarily.  I think there's a better, more frugal, safer way.

As a huge financial perk, I would argue it also allows one to seize a killer buying opportunity if it comes along that might otherwise be missed.  If someone is gets desperate and needs to unload their car for 10k cash that's worth 17k, you could write the check and save (relatively) a huge amount of money.  You've now saved your family a huge amount of money (especially considering after tax dollars - a huge hidden perk of frugality).  And if you don't need it, you could flip it for easy profit.

Lastly, I would argue that the size of your emergency fund (regardless of cash or LOC) should also have "job stability" as part of the variable.  I think self-employed person, or someone with a high degree of stability risk should make sure they have access to more funds than say a tenure teacher.

I think the concept of Emergency Funds that you covered is very important.  Unexpected emergencies that one is unprepared for can take out years of hard work and otherwise perfect planning/work.   I think the elements of utilizing a LOC and ratio'ing the safety amount to stability also improve one's ability to succeed.

I'm open to other thoughts if you see a hole in my thought process.