Certified financial planners from around the Puget Sound area offer investors a variety of ways to reinvest their Guaranteed Education Tuition units. In some cases, it's smart just to say put.
Parents and grandparents who have bought units in the state’s prepaid tuition program, the Guaranteed Education Tuition (GET) plan, have been given the option of withdrawing from the program between now and December 2016. That means anyone who owns GET units can cash out without incurring state penalties — although federal penalties could kick in, in some circumstances, if the money isn’t reinvested promptly.
Co-founder of trueNorth Wealth Advisors, a fee-only advisory firm in Seattle. Hebert is a certified financial planner and past president of the Financial Planning Association of Puget Sound.
Before making any changes, Hebert says, it’s important to keep in mind these four factors:
- Think strategically, Hebert writes. “For those who own a GET account, remember that GET is only a piece of the paying for college puzzle. If your child attends an in-state public university, tuition costs usually only represents about 40% of the total cost of attendance. And if your student attends a private or out-of-state University, GET dollars may only be sufficient to cover 20% or less of the cost of attendance. As such, it’s important to make sure any changes you consider making with your GET dollars work in conjunction with other assets you plan to use in paying for college.”
- Hebert tells investors they shouldn’t take risks they can’t afford to take. “With GET, the State bears the investment risk. Moving assets out of Washington’s GET program to another State’s 529 plan means you must be willing to bear the investment risk associated with those new investment options.”
- Choose new investments so as to minimize fees. “Not all 529 plans are created equal. We recommend using 529 plans you can purchase direct (without a broker) to avoid broker commissions. If you buy direct, we recommend using plans with age-based investment options that automatically become more conservative as your child gets older. Finally, use 529 plans with low operating expenses (less than 0.5% per year). Keeping investment operating expenses low means you will keep a higher percentage of whatever return your investments earn giving you more dollars to spend.”
- Make sure you understand the tax consequences. “One of the primary advantages of using a 529 plan is the potential tax benefits. If not executed properly, any changes you make may have negative tax consequences and could even result in tax penalties.”
If you want to make a change even after considering these factors, here are plans Hebert recommends:
“For those who are risk averse and have a relatively short-time period (1-3 years) before needing to use their GET funds, we like Michigan’s Education Savings Program (MESP), using their “Principal plus Interest Option” offered through TIAA-CREF. The Principal plus Interest Option has a minimum guaranteed effective annual interest rate of not less than 1% with a maximum cap not to exceed 3%. Small positive returns over the next couple of years are better than no return at all.
“For those who are willing to take investment risk and have more than 3 years before needing to use their GET funds, we like Utah’s Education Saving Plan (UESP) using their age-based investment options. Utah’s 529 is a direct-sold 529 plan without the expense of using a broker, and features low-cost, age-based, investment options through Vanguard. With a little luck, GET holders may be able to take advantage of the current market correction to exit the GET plan at the $117.82 payout rate and buy into a new 529 plan while stock prices are down.
“Alternatively, for those investors who are happy with the GET plan, you may want to hold off a few months before taking any action and wait to see if Washington decides to offer their own traditional 529 plan. The details of this potential program may influence how you’d like to move forward.”
Kathryn Haggitt Garrison
Senior financial adviser, Moss Adams Wealth Advisors LLC, Seattle. Haggitt Garrison is currently Chair of the Financial Planning Association of Puget Sound and served as its president the past two years.
“First off, don’t feel rushed to make a decision, as the Committee has decided to give folks from now until December 2016 to receive the greater of a refund of their contributions or current value. That said, there won’t be any growth on the assets as long as they are in the plan, so if you are going to move, you might as well do it sooner rather than later.
“It seems hard to argue that anyone who has put money into the plan within the last 5 years (the 2010-2011 plan year or later) should not just take the money out and reinvest it elsewhere. They are guaranteed no growth in the plan for at least the next two years. They have no gains and therefore no taxes or penalties owed on withdrawals.
- If their kids are starting school in the next year or two, they can use the assets to purchase stable short-term investments – CDs, moneymarkets, savings. Since there aren’t any gains to worry about, they don’t have to deal with setting up a new 529 plan.
- If the children have a longer runway, they can put the assets in a 529 plan with an allocation appropriate for the child’s age. (Many of the 529 plans have target date funds that will make this allocation for them.)
“For people who put money in during the 2009-2010 plan year or earlier and have gains in the plan, there are different approaches:
- If your child is starting school in the next 1 or 2 years, it may be best to take the conservative approach and leave the assets where they are, even though it means no growth over the next couple of years. Particularly if you purchased those units when your child was younger, you’ve likely had quite a bit of growth in the value of your plan. (e.g.: If you purchased 100 units a year for the first 5 years of your now 18-year-old child’s life. The total invested is $20,800 and your current value at the $117.82 payout rate is $38,110.) If you take a straight withdrawal, you’d owe penalties and interest on all those gains, the hassle of converting to another plan and the associated startup fees, etc. probably are not worth the switch, and you don’t want to have those assets aggressively invested this late in the game anyway.
- If your child is starting school in the next 3 or 4 years, you could take the conservative approach as outlined above. You could also consider rolling your current plan value into a 529 plan. If you have other assets that could cover college costs should the investments within that new plan lose value over the next 4 years, the rollover to a 529 probably makes sense – especially if you have younger children who could use the assets in the plan once they recover their value.
- If your child is not starting school for another 5 years or more, it will most likely make sense to roll into a 529 plan, since you will earn nothing above the $117.82 for at least the next two years. After that, we aren’t certain what will happen, but if the Committee were to decide to maintain the plan and keep the units pegged to tuition, your growth would be no more than that of inflation.
“There are listings and ratings of plans available at SavingforCollege.com. Morningstar also does a good job of rating the plans according to plan costs, underlying mutual fund fees, and fund performance. If you do roll over to a 529 plan, any gains within the plan may be subject to income tax plus a 10% penalty if the assets are withdrawn from the plan and not rolled into a 529 plan within 60 days. It’s best to work with administrator of the plan you’re moving to so they can help ensure that the rollover happens as directly and quickly as possible.”
Certified financial planner and principal, Madison Park Capital Advisors, Seattle
Featherstone advises account-holders with children who are within three years of enrolling in college, and little or no tolerance or risk, to stay in the GET program. Those who have a moderate or high level of risk should roll their money into another state’s 529 plan, “and accept some risk for the chance to make some money.”
If you’ll be using GET units four or more years from now, transfer to a 529 plan, Featherstone says. “If we take the legislature seriously and assume that they will fund higher education, the assumption we would make, would be lower increases (or no increases) in costs over the next 5 – 10 years. We would also have to make the assumption that if costs are rising in-state at a low rate, parents may be able to beat college in-state inflation by investing in a diversified portfolio of stocks and bonds (mutual funds).”
“That all being said, if there is any chance that a client’s children would be going out of state for college, that makes this discussion even more important,” Featherstone wrote. “Just because the State of Washington is keeping tuition costs down, doesn’t mean that other states are looking at their costs the same way. It could be that tuition in-state goes up by 1% or 2% over the next several years (we know for the next couple they won’t go up at all), but that out of state tuition could and very likely will go up by a much higher percentage than that, which makes it even more important to try and keep up with out of state tuition inflation.
“As we all know, where our children go to school is a function of many things, cost being only one of them. Geography, student experience, quality of education are other factors that may weigh heavier for many parents.
“As the parent of a child with both a GET account and 529 account, I got the best of both worlds for a period of time. After 2010 it became very expensive to get in the GET program when factoring in the premium one had to pay for credits. Our advice over the last few years has been, and remains, to put your money in a 529 plan where you can potentially keep up with tuition rates nationally. Since 2009, when I bought credits for my son, it has been a decent investment, but going forward (he’s 13) I will be rolling the GET account to his 529 account. If he stays in-state and his 529 account continues to do well, he will be able to make that money go further. If he chooses to go out of state then hopefully we will have kept up with that state’s increases.”
Certified financial planner, owner and managing partner of Cornerstone Financial Strategies of Tacoma, author of “Stop Trying to Keep Up with the Joneses: They’re Broke Anyway.”
Berger was long a fan of the GET program and put his two oldest daughters through college with GET units he bought for $40 apiece. “I can honestly say, during the period I was in the plan, it was the best-performing asset in my portfolio,” he said. Berger said the plan stopped being a good deal after 2011, when the price per unit zoomed.
He suggests that account-holders with children in high school — who are one to three years from attending college — should remain in GET, provided they paid $117 or less for the units. “I would not recommend a client be in an equity portfolio for monies you need in a five-year span of time,” he said. “The market is too volatile.”
If an account-holder isn’t happy about making no money on GET – the payout is frozen at $117 a unit for the foreseeable future – his next advice is to roll the money into another state’s 529 plan, but pick an asset allocation that’s “incredibly conservative.”
“Most 529s are already incredibly conservative,” he added. “So how much can you gain? That game is already over.”
For account-holders whose children have a decade or so before college, Berger recommends taking the money out and putting it in another state’s 529 plan. The website Collegesavings.org does a good job of breaking down the different types of plans offered, he said.
And GET account-holders who bought units at $163 or above should consider taking the money out and investing in another state’s 529 plan because it could take a decade, or more, to break even. “If you’ve got a five- or six-year-old, do you want to have a lost decade? I would be looking really, really hard at probably taking that money out.”
Heather Hewson Rock
Senior vice president/financial adviser with Baird in Seattle and a member of the Financial Planning Association
“With three children invested in GET, the changes in the GET program are personal for me as well as professional. Our family plans to keep our GET units, given our children are aged 7 to 13, bought units at a lower price and placed only part of our education money in GET. In view of the volatile nature of college costs in Washington state, families might want to consider diversifying their education funds beyond GET into an alternate 529 plan if they bought at a price higher than the $117 per unit, or want to diversify their education funds or intend to enroll in college in the next several years.
“The problematic nature of the GET program became clear several years ago, after the WA State Legislature granted WA public universities the right to set their own tuition rates – in effect, handing state universities a blank checkbook which left GET (and ultimately the taxpayers) on the hook to honor GET units no matter the price. After several years of double-digit price hikes by the universities, the Legislature took matters back in its own hands and dramatically lowered tuition costs this summer, a relief for many families but resulting uncertainty for those owning GET units.
“Alternatives: 529’s can be a terrific, tax-advantaged vehicle to save for education. Most other states have a 529 savings plan, as opposed to the GET pre-paid plan; many state plans are open to non-residents. 529 savings account values generally fluctuate with your choice of underlying investment, in contrast with the GET plan where one buys education units for a guaranteed price. When deciding on a 529 savings plan, among other factors families should consider would be how many years until the funds will be needed for college, their comfort level with investment risk as well as the performance of 529 accounts after all expenses.”
Certified financial planner, The Hedrick Co. of Mercer Island, a fee-only financial planning and investment management company founded in 1986.
Hedrick has decided to move most of her clients’ money to the 529 plans offered by Ohio, which offers both Certificates of Deposit (CDs) and mutual funds. “It means that we can get FDIC insured CDs that at least pay something—better than the WA GET which has a frozen payout for the next two years and then who knows,” Hedrick wrote in an email. Clients whose accounts are appropriate for mutual funds can invest in funds managed by Vanguard, and portions of the funds “that we want to be completely safe” can be invested in CDs, which are insured by FDIC. Hedrick said Ohio allows investors to pick the maturities of the CDs, “but I’m going with the 12 month ones – 0.5%, that can be rolled over – because I suspect interest rates will either rise or hold steady over the next few years.”
The Vanguard mutual funds stand out because they’re highly rated for low cost, administration and accessibility, she wrote.
Hedrick says if Washington freezes the payout for 4 years, and interest rates stay the same, a $10,000 CD at ½ percent per year, rolled over for 4 years, would grow to $10,202. If interest rates go up by 1/5 of a percent per year, the one year CDs rolled over each year would be $10,354.
She said there may be other states that sell FDIC-insured CDs, but Ohio’s plan is highly rated. Hedrick also likes the 529 plans offered by New York and Nevada for clients with young children.
She says she’s not a fan of bond mutual funds, “hence the search for the individual securities to replace the most conservative portions, which any kid within 4 or 5 years of starting college should have in their allocation.”
Director of financial planning, Clark Nuber. Bouchand provides detailed financial-planning scenarios for clients on an hourly basis, and has 18 years of experience. She was recognized as Investment News’ Top 40 Under 40 Financial Advisors in the US.
For those account-holders who bought GET units for $163 or more, Bouchand thinks the decision is straightforward: These investors should cash out of GET, she said, because they’ll get their money back. If they stay in GET, it could take 5 years – or more – to break even.
For those who bought units when they were $117 or less, Bouchand recommends that they look at the pros and cons of each alternative and decide which suits their risk level. The age of their children also plays into the decision.
For parents with children who will be going to college within the next three years, “a client should look at their overall risk level to help them make this decision,” Bouchand wrote. “The new committee decisions state that the payout value will remain at $117.82 per unit until the highest-priced university surpasses $11,782. This means that for very conservative clients, the value of their units is not expected to decrease. This would represent less risk than a 100% bond portfolio. The amount of upside return would depend on Washington tuition increasing in 1-3 years, which is a short time frame. This basically means that there is very little downside risk, and very little upside potential. Clients should consider if it makes sense to roll this money over to a 529 Plan with low expenses. With the short time horizon, a client can have a conservative portfolio (mostly bonds and cash) to minimize risk and a small amount of stock exposure (for potential growth). A conservative portfolio in a different 529 Plan account should at least have some potential for return.”
For parents with children who will go to college four or more years down the road, “it depends on the risk level of the client,” she said. “Assuming an 8% annual increase in tuition rates, the old GET program made sense for clients with children under the age of 7. For these clients, the rate of return of the GET program was better than a moderate portfolio in an outside 529 Plan. Now, it’s unclear what will be the annual increase in tuition for Washington state colleges. For conservative clients with young children, it may make sense to stay with the GET program so they can prepay college tuition costs with certainty and not take the risk of an unknown increase in tuition. For clients that think college tuition will increase at a slower pace, then it would make sense to roll their money into 529 plans elsewhere. This will give them an opportunity to invest in portfolios that have a chance to grow. The risk that the client will take in this case is market risk and the risk that tuition inflation will rise faster than their portfolio return.”
Certified financial planner and senior vice-president of ICON Consulting of Bellevue
“People GET may work well for:
- Those who bought shares more than a few years ago (at $116/unit or below), especially if you have children attending school soon, we would not recommend opting out of the program because the redemption price has been locked in.
“People GET may not work well for:
- Kids older than around 5
- Anyone thinking about contributing on a monthly basis
- People who bought units at $163 or $172 (past 3-4 years)
- For someone who paid $172 – they could potentially cash the units out entirely and reassess. Penalties only get assessed on gains – in that situation, you probably wouldn’t have a gain.
“The most difficult decision is for people with very young kids (under around age 5), which completely depends upon one’s assumptions around growth rates of tuition versus general inflation and potential investment returns. This also depends somewhat upon the circumstances and risk temperament of each family. College tuition has outpaced general inflation for decades, but whether that continues is anyone’s guess. GET was a pretty good deal when tuition was rapidly increasing, however, the 46% premium to purchase units at $172 versus the current redemption price of $117.82 is a huge hurdle to overcome, particularly given the current uncertainty around future tuition increases.
“There are other 529 options than the Washington GET program. Since we have no state income tax, there really isn’t a disadvantage to selecting an out of state program. There are over 100 GET programs to choose from. A good source for general education and comparison between programs is: www.savingforcollege.com. Selecting the right one for your specific family’s needs depends upon a number of factors.
“I personally own GET units for our two boys, currently 7 & 11, as a subset of my overall college funding strategy. However, I have not bought any in the past couple of years and will not be purchasing any further units for either child going forward.
“Finally, we NEVER think it is a good idea to use the ‘custom monthly payment plan,’ which assesses a 7.5% annual fee. Instead, save your pennies and make lump sum purchases!”
Certified financial planner with Brooks, Hughes & Jones Wealth Advisors, an independent registered investment adviser in Tacoma who provides financial planning and investment management to families and nonprofits throughout Puget Sound.
“I’ve been a proponent of GET for a long time and remained one even through the payout freeze over the past few years — as long as you were investing while the child was very young. But the state legislature’s decision has defeated the purpose of this program for many participants.
“If you expect to use GET units for this school year or next, it may make sense to stay in the program simply because there isn’t enough time to gain much by moving to a different option. People who have paid $172 per unit over the past few years paid a 46% premium over the current $117.82 payout value. Because tuition is declining below that payout value, there will be some gain between the $117.82/unit payout and the actual cost of tuition at Washington state colleges but not nearly enough difference to make up for the large premium that was paid.
“And if you were an early investor who experienced good returns up until 2012-13 when the payout value was first frozen, you may be happy enough with that return even if there is no prospect for growth in payout value for several more years. This particularly applies if you are entirely risk averse and certain that your child will attend a Washington state public college.
“However, I think it will make sense for most people to request a full refund. In this case, I recommend moving redeemed GET proceeds to the Vanguard 529 affiliated with the state of Nevada. It is low cost with solid investment choices. There is no need to buy a more expensive broker-sold 529 option. And the affiliation with Nevada is not a problem for Washington residents. We can participate in any other state’s plan because there is not a Washington 529 savings plan and we don’t have a state income tax so there is no tax deduction for contributions that would apply anyway.
“While the lowering of tuition is a good thing for many people, GET participants – mostly those who have purchased units since 2011-12 – have been financially harmed by the legislature’s decision. They’ve suffered an opportunity cost by having purchased GET units instead of putting the same amount of money into a 529 savings plan.
“I assume that the payout value will stay at $117.82 for at least five more years, possibly longer. The next two years of lower tuition are in place. After that, if we assume that tuition starts to rise again based on the wage growth calculations that have been proposed, it still likely takes at least a few years to get back to the tuition rate from the 2014-15 school year before the 15% decrease. If you sit in GET for another 5 years with no return, that’s a potentially large opportunity cost.
“This opportunity cost is most significant for students who don’t intend to use the units to attend Washington state public colleges. If they go out of state or to a private school where costs are still rising, they fall farther behind. They’ve already had three years of no growth in payout value.
“It seems clear to me that anyone who paid more than the current frozen payout value should take the full refund of their contribution and rollover to a 529 savings account. But even someone who was an early GET investor may want to as well. A personal example: I bought units for my daughter in 2002 at $52 per unit. She is currently entering 8th grade. The current payout value/redemption value of $117.82 represents a 126.6% return on our investment over 13 years, a little less than 10% annualized. If we wait until her freshman year of college and the payout value is still at $117.82, which seems probable, the annual return on that investment is down to 7%. Alternatively, I could move that move to her existing 529 savings plan and capture more tax-free growth over the next five years. Even if it is invested very conservatively and doesn’t generate much more return it will likely be beneficial compared to staying in GET.
“For comparison sake: While GET payout value has been frozen the past three years, the Vanguard Moderate Age-Based Portfolio for 11- to 15-year-olds gained 3.87% per year over the past three years ended August 31. That’s not anything to get excited about since tuition inflation surpasses that nationally, but it’s a lot more progress than GET has provided. (Of course, it’s important to note that in 529 savings accounts that there is investment risk and no guarantee of growth.)
“It’s best to make this change as soon as possible. The 16-month window the state offers to decide is just more time with no return on your investment while tuition climbs almost everywhere outside of the Washington state system. And when making the change, it is important to do it within the 60-day rollover window in order to avoid any tax penalty.”
Brooks offered these other thoughts:
• The tuition decrease will benefit a lot of people, but the legislature has dealt GET administrators an awful hand. They communicate a very positive spin that things will work out OK and that the program is well funded to meet its liabilities. But it seems that this action will eventually lead to permanent closure of the GET program. There are too many unknowns to participate. Significant redemption requests could also make it difficult for the state investment board to manage the portfolio for a time, possibly sacrificing some return.
• Another option GET should consider is allowing the use of more than 125 units in a year. If a student goes to a private college this year and could use more units to cover the higher costs, they should be allowed to, rather than be forced to wait while receiving no growth in the payout value.
• Even if the state expedites the process of establishing a 529 savings plan here, it will take a long time. It will have to find an investment manager to run the program. The due diligence process to find the manager is lengthy. (As an aside, when I worked at Russell Investments in the early 2000s, I’m pretty sure Russell weighed the opportunity to be the manager of a Washington state 529 and passed. The 529 savings accounts haven’t been incredibly attractive programs for investment managers, largely because they are underutilized. The recognition of them remains low.)
• GET was never meant to cover more than in-state public school tuition. Even if a student went to a state school, there are other substantial costs to cover. There needs to be some form of savings or financial aid beyond GET. People with the means and desire should have been contributing to a 529 savings plan in addition to GET anyway.
• What are the other ramifications of lower tuition? It seems logical that this could reduce the quality of education. Lower tuition means lower budgets for universities and therefore reduces their ability to compete for the top educators and their ability to support programs, research, etc.