At first glance, Washington State's Guaranteed Education Tuition program might seem appealing to parents looking to start saving for their kids' college education, but according to the experts, its benefits are by no means obvious. Although money invested in the GET is guaranteed to be there when the children are ready to enroll in college, the program doesn't offer anything in the way of making the money grow over the years until it is needed to cover tuition.
Betty Lochner, who heads up Washington's GET program, assures investors and potential investors that the model works, even while recent reports say that it underfunded by more than $630 million. While it is unlikely to have problems meeting its obligations in the short term, lawmakers are already looking at ways to make sure that it remains viable in more distant future.
Meanwhile, college financial expert Mark Kantrowitz, who publishes the FinAid.org and Fastweb.com websites, says that parents who are looking for ways to save for college are better off looking at solutions other than pre-paid plans like the GET.
The problem with prepaid tuition programs is that current investors are paying extra fees to cover expected tuition increases in the future as well as making up for the program's current budget shortages, he said.
Although prepaid tuition participants do not lose their savings when the stock market goes down — as did many families who had their college savings in regular 529 college savings plans a few years ago — they also don't see the same gains others do when the stock market improves.
Kantrowitz recommends that parents consider 529 college savings plans instead, even with the inherent risk. In exchange for accepting a certain chance of loss, parents will also benefit from stock market rallies while not being put in a position to cover tuition expenses of others.
Washington isn't the only state in the country operating a prepaid tuition plan. There are currently 11 others accepting money throughout the country, though only four others have a government guarantee attached to make good on any capital the fund takes in. Since opening, GET has paid out to more than 27,000 students, and an additional 120,000 have at least some money invested with the plan.
Risk averse parents who find the terms offered by GET appealing should look to take advantage of it in the near future. As they have done every year when the state revenues have fallen and a budget shortfall threatens, Washington lawmakers are once again talking about either freezing the plan to new participants or phasing it out in favor of 529 funds.
State Sen. Rodney Tom, D-Bellevue, expects the Legislature will change the program sometime in the next few years.
The chair of the Senate Higher Education Committee said a number of ideas are being discussed to both address the program's financial issues and find a way to allow universities to charge higher tuition for more expensive majors like engineering so they can afford to educate more students in those fields.
Tom said even though it's tempting to just put it off and keep digging a bigger hole, 10 states have already ended their programs.