GET out or stay in? Washington prepaid-tuition investors should weigh a few factors, experts say

One college-savings expert calls it a “no-brainer” — a new state law that allows people invested in Washington’s prepaid college-tuition plan to roll over into a different type of plan and see a 38 percent increase in the value of their account overnight.

“That’s a lot of free money,” said Mark Kantrowitz, of Illinois, who publishes a website, Savingforcollege.com, that analyzes 529 college-savings plans and gives advice on how to invest in them.

Free money is exactly what bothers Laurie Klein, a principal at Kaizen Financial Advisors in Kirkland.

“This seems blatantly unfair to those investors who no longer hold units,” said Klein, who advised a number of her clients three years ago to cash out of the Guaranteed Education Tuition (GET) plan and put their college savings elsewhere. “It’s only benefiting a few people, and not the people who created the surplus.”

More on that controversy later.

The important thing to know is that if you’re invested in GET to pay for college, you have until Sept. 12 to make a decision. And if the volume of inquiries to GET’s contact center is any measure — hundreds of phone calls and emails in just the first week — you have a lot of questions.

GET 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. It is like an insurance policy — no matter how much tuition goes up, 100 GET units is guaranteed to cover it. The state of Washington assumes the risk.

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. Tuition cuts combined with gains in the stock market have made the reserve possible.

Two years ago, lawmakers passed a bill creating a second, state-run option for saving college money tax-free. This 529 college-savings plan is called DreamAhead, and it’s like a 401(k) or Roth IRA, with fund choices in stocks and bonds. There’s also no guarantee — the individual investor assumes the risk, but also the possibility of a greater reward if the market does well.

This spring, as a way to try to slice up the surplus while encouraging enrollment in DreamAhead, the Legislature passed a law that allows families who own GET units purchased before July 1, 2015, to roll those over into Dream­Ahead 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 a unit is rolled over into DreamAhead, its 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 $143 incentive.

That’s the “free money” part of the deal.

There’s also another consideration. Those who remain in GET could receive more units, a process called “rebasing,” which is kind of like a stock split. 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 percent more money than it needs to pay off its obligations, everyone who still owns GET could receive a second rebasing adjustment.

Here’s the catch: GET won’t be able to tell you how many extra units you will get until after the Sept. 12 deadline passes.

Option 1: GET out

Kantrowitz, a national expert on saving for college, thinks the rollover is a clear winner. “It’s such a good, immediate improvement that it’s hard to see how staying would be better,” he said.

He thinks that’s even true for those who are essentially underwater — who bought into GET between fall 2011 and spring 2015, when the price per unit was between $163 and $172. Those make up about 12 percent of the units eligible for the rollover.

“You need to forget about the past,” Kantrowitz said. “There’s greater risk, in my opinion, with staying than with going, and there’s greater return with going than with staying.” (Full disclosure: Kantrowitz makes money through his ad-supported website, where most states’ 529 savings plans and prepaid-tuition plans advertise.)

The advantage of a 529 savings plan versus a prepaid savings plan, he says, is that you’re in control — you can choose to invest as conservatively or as aggressively as you want.

State Sen. Mark Mullet, D-Issaquah, who sponsored the bill that created the rollover, also says rolling over is the best choice for all investors. In fact, he’s “a little nervous people don’t realize what a big benefit it is.” (Full disclosure: Mullet owns GET units and serves on the state’s investment board, which decides how to invest GET funds.)

Mullet also thinks the rollover makes sense for those who are underwater, even though they’ll skip two potential chances to acquire more units.

When compared to other states’ 529 plans, Kantrowitz said, DreamAhead is a solid plan with low fees and plenty of investment options. He advises investors to choose age-based plans, which become more conservative as a child gets closer to college age.

Mullet says investors who like the safety of GET can choose a conservative bond fund within DreamAhead that averages a 3 percent annual return.

Option 2: Think hard before getting out

Kim Miller, a financial adviser with Sweetwater Investments of Seattle, is leery of offering a blanket statement of investment advice for every GET investor.

He says investors should first figure out how much they paid for their units and whether that cost is higher or lower than the rollover amount. Also important: knowing how long before their child will need the money, whether they are comfortable with investment risk, and what they will do if they accept the rollover offer and later decide they don’t want to stay. (IRS rules allow for one 529 plan rollover within a 12-month period.)

Joe Hebert, a past president of the Financial Planning Association of Puget Sound, echoes many of those ideas. GET and DreamAhead are very different, he said, like apples and oranges.

Hebert, of trueNorth Wealth Advisors of Seattle, also called GET “just a piece of the college-savings puzzle” because investors can only buy a maximum 600 GET units for each child, and can only use 150 units each academic year. Many parents use both GET and traditional 529 savings plans to finance a college education, he said. (Earnings from both are exempt from federal taxes, and covered by Section 529 of the Internal Revenue Code — hence the name 529 plans.)

He cautions that leaving GET means leaving a program in which the state carries all the investment risk, and trading it for a plan where the investor carries all the risk.

But he also wonders if GET will make sense for the future.

In 2015, the Legislature cut tuition at public universities and limited the rate of tuition 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 percent tuition increase. That’s one reason GET has such a big surplus.

That bill “reduced the risk that college-tuition expenses will spiral out of control,” Hebert said. “As such, the fundamental promise of GET remains in effect, but the underlying risk of out-of-control tuition expenses has also been mitigated.”

GET a headache for financial planners

The decision to give money back to people who stayed in GET has frustrated the region’s certified financial planners, some of whom feel like the common-sense advice they gave their clients three years ago now looks like bad advice.

Chris Featherstone, a Seattle-area certified financial planner, thinks the state has done a poor job of stewarding the program that allows parents to save for college tax-free.

“Since I work in the investment world, I am very familiar with risk, but very much unfamiliar in terms of money from nothing, which is what this seems like,” Featherstone wrote in a letter to several state senators.

“I hope that you will head some sort of effort to make this fair for those of us who were forced to make decisions based [on] inadequate laws, funding and oversight, and treat current and previous GET participants fairly and equitably,” he wrote.

Klein, of Kaizen Financial Advisors, says the rollover law “seems blatantly unfair to those investors who no longer hold units. It’s only benefiting a few people, and not the people who created the surplus.”

She, Hebert, Featherstone and others in the financial-planning community have called on a few state senators to rethink the rollover.

Mullet, the state senator who sponsored the legislation, says it’s a fair law, and argues that people who cashed out in 2015 had three years to invest elsewhere, at a time when the stock market was on a historic run-up and the GET payout value was frozen. About 26,000 accounts were cashed out.

“We’re trying to help GET families send their kids to college, and we’re offering them a lot of money to do that,” he said. Even those who stay in will likely get additional units — “Everybody will get something out of this,” Mullet said.

State Sen. David Frockt, D-Seattle, was one of 12 lawmakers who voted against the bill, in part because he was concerned that former account holders had lost out by cashing out before the rollover option was on the horizon. He also worried that a recession or other financial crisis could deplete GET’s reserves, as has happened in the past.

But, he said, there’s no way to stop the rollover process now.