Hottest thing off campus? Investing in GET credits

With a week to go before annual enrollment closes in the state's prepaid college-tuition program, and as the Legislature considers changes that would make its payouts less generous, Washington families are snapping up Guaranteed Education Tuition (GET) credits at a record rate.

The program is bringing in $1 million to $2 million daily and adding about 200 new families each day, on pace to be at or above the biggest year for the program.

State legislators are considering a bill, Substitute Senate Bill 5749, that would change the terms of the payouts. The legislation would not affect GET credits purchased before Aug. 1.

"We're on target to have our first or second biggest year ever," said GET program director Betty Lochner, who said families are buying credits now because they fear the legislative changes will take away the advantages of buying into GET.

"We are seeing some buyer behavior change," Lochner said. "People are doing their homework."

Legislators are considering amending the 13-year-old program because they say tuition is growing so fast that it could outstrip the program's ability to provide payouts. The program guarantees that if that happens, the state will pick up the shortfall. But one legislator says no changes may be necessary if a new state study shows the program is healthier than initially thought.

GET is solvent today, but theoretically, if every family enrolled in the program tried to cash in at the same time, it would only be able to pay out 86 percent of benefits, leaving a $255 million shortfall, according to one state study.

Lochner said the state is on pace to create 15,000 or more new GET accounts between now and March 31. The largest year for the program was 2008-09, the first time there was a double-digit increase in state tuition; 15,550 new accounts were created.

The increase in GET purchases helps buoy the program financially, Lochner said, because it gives the state more money to invest. GET contains about $1.4 billion in assets, and the money is invested in stocks, bonds and other investments, much like a pension fund. There are nearly 129,000 GET accounts; a student can have more than one account.

Although the deadline for creating an account this year is March 31, investors have another month — until April 30 — to purchase credits at the current price of $117 apiece. One hundred GET units are currently worth the cost of one year of tuition and fees at the most expensive school in the state, which alternates between the University of Washington or Washington State University. This year, it's WSU, and each credit is worth $85.92.

When the bill changing the GET program's terms was first introduced, sponsoring senators Lisa Brown, D-Spokane, and Mike Hewitt, R-Walla Walla, described the bill as tying the GET payouts to the average of tuition rates at the state's six four-year schools.

As it turns out, the terms may be even less favorable than initially portrayed.

The bill actually says that GET payouts would be tied to the price of tuition and fees at the time of purchase, multiplied by the average percentage increase in resident undergraduate tuition and fees at all state public higher-education institutions, weighted by the number of full-time resident undergraduate students.

Lochner said she believes such a formula would include community colleges, where tuition has increased at a lower rate. The language of the bill has caused a good deal of confusion, she said. "There's a lot of misinterpretation about how they wrote it and what they meant."

The bill, which passed the Senate, is currently in the House Higher Education Committee. No significant action is expected until after the Office of the State Actuary releases a report March 31 on the financial health of GET.

Rep. Larry Seaquist, D-Gig Harbor, and chairman of the Higher Education Committee, said he believes the actuary report will show that the program can manage costs by increasing the price of the GET credits. And that would mean the GET program would not have to be amended at all, he said.

"It is a good deal," Seaquist said of the current program. "And it has the machinery to respond to changing market conditions and tuition rates."

The value of GET's portfolio is constantly in flux, Lochner said. The state study that concluded GET could only pay out 86 percent of benefits was performed last summer. Since that time, Lochner said, GET has recovered somewhat, and is now at 92 percent. Two years ago, the GET fund had a 17 percent surplus.

Robin Tan, a certified financial planner in Kirkland, said investors need to be aware that buying GET credits today means paying a premium on current tuition prices. Because a GET credit purchased today for $117 is only worth $85.92 at today's valuation, an investor is, in effect, paying a 36 percent premium on today's tuition price and betting that tuition will rise beyond that point when his or her children are ready to go to college.

"The cost today is pretty high," Tan said. "There are not many investments where you put out 36 percent before you make a return."

For that reason, GET makes the most sense for families of very young children, Tan said. GET might not be the best bet if the student for whom the credits are being purchased is going to college in five or six years. "The older your child is, the less of a deal it is," he said.

Tan also said investors should think about how much risk they're willing to take, and how fast they think tuition will rise.

He suggested that investors divide the premium by the number of years remaining between now and the time their child goes to college. For example, if your child is going to college six years from now, divide 36 (the premium percentage) by six years. You're betting that college tuition will go up by at least 6 percent a year between now and the time your child is ready for school, and that you can't get a better return on your investment elsewhere. (GET savings are tax-free.)

Tuition at the state's two research universities, WSU and UW, rose by about 14 percent in 2009-10, and another 14 percent in 2010-11. Gov. Chris Gregoire has proposed an 11 percent increase each year at the UW and WSU for 2011-12 and 2012-13. The state's regional universities would go up by 9 percent, and community colleges would go up 7 percent. However, after the state's budget shortfall grew last week, some observers said they think tuition will have to go up even more than that.

Still, there is probably a limit to the amount tuition can increase, Tan said. "If tuition goes up 10 percent a year for the next 10 years, no one could afford to go to school," he said.

Katherine Long: 206-464-2219 or klong@seattletimes.com