A friend of mine recently asked my opinion of Washington state's Guaranteed Education Tuition (GET) program.
As the Evergreen State's 529 prepaid college tuition program and backed by the state's full faith and credit, GET allows parents to purchase "units" in today's price and guarantees a payout value that is indexed to the tuition of the highest priced Washington public university. (Each unit represents 1/100th of the annual undergraduate tuition and "state-mandated fees.")
The main selling point: in the past 10 years, tuition in this state has increased at an average of 9.5% per annum (source). In fact, GET units bought back in a decade ago delivered handsome return for their investors despite the financial turmoil in between.
My friend is attracted to the seemingly brilliant offer, until I pointed him to the fine print: the unit price today is $172, but the payout value of each unit is only $117.82. Yes, one need to buy a GET unit at a whopping 46% premium!
In mutual fund terms, every $100 one invests at the current price will be charged a ransom-like 31.5% front-end load. Will you ever buy a fund with 31.5% front-end load?
But how about the tuition guarantee? Compared to investing in a low-fee index fund, will a parent still be better off by getting guaranteed returns, 9.5% annually in the last decade, despite the upfront cut?
In the following table, I compared 1) the payout value growing from $117.82 at 9.5% a year, with 2) do-your-self investing with annual returns of 3%, 5% or 7%, starting from a base of $172. 20% capital gain tax is assessed on the DIY scenario at withdrawal only.
Despite the vast difference in compounded growth rate, our DIY investor growing his assets at 3% rate will still be better off after 5th year. At 5%, which is approximately the S&P 500 growth over the last decade, DIY investors will still be ahead after the 7th year. And compared with someone who will grow his investment portfolio at a still-modest 7% a year? Our GET investors will need to wait 12 years to get ahead.
But what if one is really patient? Stay tuned for more analysis on investing in GET in our next post.