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Washington State GET Is a Loser's Game, Part II

Contributed by mm | February 6, 2014 6:14 AM PST

Our analysis indicated that if tuition cost will continue to grow at 9.5% per annum, investment into Washington state's GET program can still make sense for people with a long horizon, even if one will pay a hefty 31% front-end load now.

But for those patient parents, it is worth keeping in mind that past return doesn't guarantee future returns. In fact, the tuition at Washington state's top public universities didn't grow in the past year. And according to some reports, slower tuition growth is becoming the new normal.

The next table shows a scenario of more moderate but still high annual tuition growth of 5%, and how it compares to a DIY investor with 1%, 3% or 5% annual return on his portfolio.

6431-get.gif

Our hypothetical patient parent will grow from the base of $117.82, and by year 10, he will finally get ahead of his neighbor who just park his money in an average online savings account with 1% APY. It will take our GET investor 16 years to get even with a DIYer who can grow portfolio at a modest 3%.

And compared to a properly managed portfolio with 5% annual growth? Our GET investor will be 23% short after a whopping 18 years!

Let's also not forget our DIY investors can always use the portfolio for some emergency expenses but GET investors will always be locked in unless they want to pay a 10% penalty and cash out at the payout rate. (Which means, if you pay $172 to get a GET unit today and want to cash out tomorrow, you will only get $117.82 x 90% = $106.04, or an immediate 39% loss overnight.)

In addition, although the GET program is backed by the "full faith and credit" of the state, the wording is not included in the state constitution, which means, although unlikely, a future legislation can throw it out completely. Actually, there is inherent dilemma in how the GET program works that a legislative intention to reduce the public school funding by increasing tuition will be met by more payout from state treasury thru the GET program.

As of our household, I am a firm believer of DIY investing thru blue chips and index funds and ETFs. And our son is 6.5 years away from college, so math won't work in GET's favor by any stretched assumptions.

That's why I called GET is a loser's game.

What's your take on GET?

This Post Has Received 2 Comments. Share Your Opinions Too.


Manoj Commented on March 8, 2014

Hi
This is very informative. I had one observation and two questions. a) tuition fees have been on a secular trend of increasing > the rate of inflation. It seems wiser to assume a projected expense increase closer to 9.5% /- 2% vs 5%. a) how does one reconcile guaranteed indexing from the GET program ( whatever the tuition increase might be) vs. a volatile s&p return (b) why look at the pretax numbers for DIY vs the post tax numbers? Is there cap gains on the GET units too?


mm Commented on March 17, 2014

Hi Manoj,

Good points. I agree with you that tuition increase will be higher than inflation but if last year is an indication (where zero tuition increase was posted), the growth will be more tapered.

On your two other questions:

a) Yes that's a fair point. There is no guarantee that an S&P approach will bring the right yield at the right time. On the other hand, college savings span across over a decade (if you start early) so it's lesser of an issue.

b) A more tax-advantaged way for DIY is the 529 college savings plan (vs. GET which is 529 prepaid plan). Your withdrawal for educational expenses will be tax free too. So the pretax number is a fair apple-to-apple comparison between GET and DIY options.


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