MONEY TREE: Wash.’s Pre-Paid Tuition Program Under New Scrutiny
SEATTLE (AP) — As Washington’s prepaid tuition program opens its doors to new investors, parents and lawmakers are taking a closer look at the program and trying to decide what is best for the state and its children.
As they have every year since the recession began, lawmakers are talking again about changing the Guaranteed Education Program to improve its long-term viability and to give Washington’s universities more tuition flexibility.
The program is underfunded by $631 million, which means it doesn’t have enough money to meet all its obligations if every kid enrolled decides to go to college next year.
But since preschoolers and kindergarteners are unlikely to make that decision, the people who manage Washington’s prepaid tuition program say that’s unlikely to be a problem.
“Nothing has changed,” maintains Betty Lochner, director of the Guaranteed Education Tuition program. “The model works.”
Parents and grandparents who use Washington’s program to save for college are guaranteed that they will have that money to pay for college when their kids graduate from high school.
The program doesn’t aim to be more than a way for parents to have peace of mind about their ability to pay for college eventually, as well as a way to save money on college tuition if they invest early enough, Lochner explains.
Research also has shown that teens that plan to go to college are seven times more likely to do so if they have a college savings account in their name, Lochner said, quoting from a 2010 study by the Center for Social Development at Washington University at St. Louis.
Saving for college is essential, but prepaid plans are not the best way to invest, said Mark Kantrowitz, publisher of FinAid.org and Fastweb.com.
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.
“You’re better off being in a 529 college savings plan where you have all the risk, but you also have all the reward, and you’re not paying for someone else’s college education,” Kantrowitz said.
This year’s price for one Guaranteed Education Tuition unit is $172, which translates into $17,200 for a year of tuition and state mandated fees at the University of Washington or Washington State University. That doesn’t include room and board.
Two years ago, one tuition unit cost $117, which at $11,700 for 100 units would be slightly less than this year’s tuition at UW and WSU.
GET accounts have helped send more than 27,000 students to college. Another 120,000 have money in the system that can be used at any public or private college, university or vocational school. Investors do not pay taxes on income growth or withdrawals.
There are 12 open prepaid tuition plans across the country. Ten other plans have been suspended or closed, mostly because of financial instability. Only five, including Washington, are guaranteed by the state, which means the government would have to bail the program out if it couldn’t meet its obligations.
During the 2011 Legislature, lawmakers debated freezing the current Guaranteed Education Tuition program and starting a new, less generous plan.
State actuary reports have called the program sound, but lawmakers have started to talk again about changing or replacing it.
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.
Although the program should have enough money to make it through the next decade or more, Tom said the Legislature has an obligation to fix it now, not leave it for the next generation of lawmakers.
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.
“States realize they have plenty of unfunded liabilities in their pensions and health care retiree programs that they don’t need to add one more,” he said.
Several options are being discussed: changing the program slightly, closing it and paying people back or keeping it open to existing investors and replacing it with a new kind of 529 savings plan for the future.
“I think people send us down to Olympia to be rational adults and sometimes you’ve got to make tough choices,” Tom said.