A Republican plan to cut state tuition by 25 percent would also cut the value of prepaid college tuition units, but lawmakers say investors will get more units to make up the difference.
A GOP proposal to slash state tuition by 25 percent would have unintended consequences for the thousands of families who have paid for their children’s college tuition in advance, some Democrats say.
State Rep. Reuven Carlyle, D-Seattle, says Republicans are “charging forward” without having fully analyzed what a tuition cut would mean for families who have already invested thousands of dollars in the state’s prepaid tuition program.
Nonsense, says GOP Sen. John Braun, R-Centralia. The vice chair of the Senate Ways and Means Committee said no one would lose money.
How GET works
The basics: Parents prepay college tuition for their children, with 100 GET units worth one year of tuition and fees at the state’s most-expensive public university when the child enters college. The money can be used at private and out-of-state colleges, as well.
Cost: One GET unit currently costs $172. The price includes a fee of roughly $20 per unit, which was added in 2011 to make up for a series of years in which GET was underfunded. GET predicts that it will take at least six years for a parent to realize a gain on the investment, and discourages parents of older children from investing in the program.
Payout: Today, the payout value for one GET unit is $117.82. The program is guaranteed by the state; if, for some reason, the fund doesn’t have enough money, the Legislature must step in and make up the shortfall.
Impact of the GOP tuition-cut proposal: GET accounts would retain their value, but under one scenario, account holders would gain more units because each one would be worth less. For example, someone who has 100 GET units today valued at $117 apiece would, under one scenario, be granted 133 units at $88 apiece. In both cases, that person’s GET account would be worth about $11,700.
Source: GET, Seattle Times research
At issue is how a deep tuition cut would affect the Guaranteed Education Tuition (GET) plan, the state-backed program that allows parents to pay college tuition in advance. GET’s value is tied to state tuition costs, so if tuition goes down, so too does the value of a GET unit.
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The Senate Republicans’ plan would “hold current GET owners harmless, and improve the soundness of the program,” said Braun, one of the principal architects of the plan, which would make Washington the only state in the nation to cut public-college tuition this year.
If the tuition cut — outlined in SB 5954 and reinforced in the GOP’s budget proposal — were to pass, everyone who holds GET units would receive, in effect, a kind of “stock split,” said Braun. They’d be given more units to make up for the lower value of each unit.
Lawmakers are stuck in a budget stalemate and started a second special session Friday, holding daily negotiations hosted by Gov. Jay Inslee.
Braun admits that all the uncertainty may hurt GET sales this year. “Until we get on a path to a reasonable tuition policy, it’s going to be hard for some folks to make that investment,” he said.
Indeed, many investors seem to have realized that already.
The number of new accounts opened each year has fallen from a high of more than 15,000 in 2011 to a little more than 4,000 this year, as of Friday. The deadline to open a new account this fiscal year is Sunday, May 31.
Sales, too, are off from their high in 2011, although they’re up 6 percent over the same time last year.
To be sure, 2011 was one of GET’s hottest years ever — a time when tuition was rising by 16 to 20 percent annually. Parents flocked to the program, snapping up more than 2.5 million units at $117 apiece that year, banking on the idea that tuition would soon zoom above $11,700 a year. (One hundred GET units pay for one year’s tuition and fees at the state’s most-expensive university, and can also be used for some other college expenses.)
Those parents have broken even. But they haven’t benefited the same way as parents who invested a decade ago.
Barb Chessler’s family invested in 500 units of GET for daughter Randi Klinck about 10 years ago, when the price was between $61 and $76 a unit. A friend and financial adviser recommended to the Edmonds mom that she buy as many units as she could, because of the guarantee. “He said, ‘You can’t lose with this investment,’” Chessler recalled.
“I can’t imagine today that would be the same advice,” said Chessler, who has worried that she would lose a quarter of her investment if the payout value were reset by the tuition-cutting measure. Klinck will be heading to college next year, and the family’s entire college savings consists of GET units.
Braun said investors like Chessler won’t lose any money.
The payout value would shrink from $117 today to somewhere around $88, give or take a few dollars, because tuition at the most-expensive university in the state would go down by that much. But each investor would then get approximately 33 percent more units to make up the difference — enough to account for variables in tuition and fees.
Braun calls the 25 percent tuition cut for the state’s four-year colleges and universities a winner — it would work, in effect, like a middle-class tax cut for the parents of kids who often don’t qualify for financial aid and must pay full price for college tuition. The full cut would take effect this fall, rather than a year from now, as Republicans originally proposed. And going forward, the GOP proposal would link tuition to the state average annual wage, which tends to rise by only 3 percent to 3.5 percent a year.
House Democrats have proposed freezing tuition and putting more money into state financial aid. They say Senate Republicans haven’t spent enough time studying the ramifications of lowering tuition.
“The state of Washington has made a social contract with families that have purchased GET credits, and we cannot take that lightly,” Carlyle said. “I cannot stress enough that the anxiety level is rising, that the Senate is charging forward on an idea without having conducted an objective financial analysis.”
Carlyle said state Treasurer James McIntyre would release an analysis of how GET would fare under the GOP plan Monday. Earlier this week, McIntyre declined to comment.
But Braun said he thinks a tuition drop would help, not hurt, GET. And state Actuary Matt Smith, who briefly analyzed the impact of dropping tuition, agrees.
During the 2008 recession, the double whammy of a plunging stock market and steeply rising tuition left GET underfunded by as much as 20 percent. Today, it’s back on track, funded by about 106 percent — meaning that the roughly $3 billion in its investment portfolio is more than enough to pay college costs for the 160,000 account holders.
If the price of college dropped, Smith said, GET would be even more robustly funded — with between 133 percent and 173 percent of the money needed to pay its obligations. It would be healthier because the GOP plan would tie future tuition to the slow-growing state average annual wage. Currently, tuition is not tied to anything, although before the recession, it went up by about 7 percent a year.
“This is evidence we’ve really thought it through,” Braun said of the actuary’s report.
Still, a future legislature could change or scrap Braun’s bill, dubbed the College Affordability Program. If the economy tanked in two years, the Legislature could once again slash funding to higher education and increase tuition.
And what of the investors who only recently bought into GET, paying the highest price — a 47 percent premium on the value of the units?
“That all depends on how the GET program responds to this,” Smith said. “The (GET) committee has some tough policy choices on how to move forward.”
One possibility: The GET board might drop, or even refund in some fashion, the “amortization” fee of $20 per unit that it began charging in 2011 to try to bring the fund back to financial health after the wild swings of the recession, GET Director Betty Lochner said.
Lochner said the GET staff hears from a few concerned investors every week who fret that they’ll lose money. Most of those parents are the ones who bought into GET recently and will be cashing out soon.
“We’ve been really transparent on our website with what we know and don’t know,” Lochner said. “People are still waiting to see — they don’t automatically think they’re going to lose money.”
She noted that the program has been around for 17 years, and has built up trust and confidence among its investors. “We’ve had other crises before, in terms of jumps, when tuition went up faster than we thought, and we weathered those,” she said.
Seattle financial adviser Michael Pace has recommended GET to his clients in the past. This year, he doesn’t have any clients investing for college — but if he did, he said, he’d be reluctant to advise a GET investment today because of the uncertainty: “I’d probably tell them, ‘Wait and see.’ ”