New participants can enroll in Washington's Guaranteed Education Tuition Program (GET) beginning Sept. 15. The price for one unit is $101, good through April 30, 2010. The rate will probably go up with the next adjustment on May 1, 2010.
The state of Washington guarantees that if you buy one year of college tuition today (100 GET units), you will have one year of college tuition when your child is ready for college. You can buy any number of units, up to 500 units to pay five years' tuition at Washington's most expensive public university, either the University of Washington or Washington State University.
Payments are flexible. You can set up a monthly payment plan for a set amount, send a check whenever you have extra cash, or chose a combination of the two. You can open an account for anyone – your child, grandchild or friend. Either the account owner or the prospective student must be a Washington resident at the time of enrollment.
The after-tax money you put into your GET account will grow tax-free. The money you withdraw will be tax-free also, as long as you use it for qualified education expenses.
When you are ready, you can use your account at nearly any public or private college in the country and some international schools. Community colleges are also eligible. It can be used for tuition or other qualified educational expenses, including mandatory fees, textbooks and room and board. If your child doesn't go to college, or receives a scholarship, you can transfer your account to another family member or request a refund.
For more information or to enroll, call 1-800-955-2318 or visit www.get.wa.gov.
Aura MacArthur and her husband had to pay all of their own college expenses, and they don't want their two children, now 3 and 7, to be saddled with the same burden. The Sumner couple put the money their children received as babies into Washington's Guaranteed Education Tuition Program (GET). Under the plan, families can pre-pay college tuition at today's cost with the guarantee that their investment will keep pace with inflation.
Fifty percent of the children's birthday money still goes into GET, and a set amount is deducted from MacArthur's state paycheck. The uncertain economy has prevented the MacArthurs from increasing the amounts they set aside, but has not tempted them to abandon their college savings strategy.
“Inflation is only going to get worse,” MacArthur says. “We do it now, or we do it later.”
Dennis Schnabel of Bellevue also started early, opening GET accounts for his two grandchildren, now 2 and 4, when they were born. “I wish I'd done more sooner,” Schnabel says, referring to the recent 33 percent increase in the cost of one unit of GET investment (100 units equals one year of tuition at the state's most expensive public university).
Schnabel has not been able to increase the monthly amount he contributes, so his contribution now buys fewer units. Still, he says, “with costs continuing to go up, the more you can put away early the better.”
GET director Betty Lochner used the program to help save for her son's education at Washington State University and her daughter's at Whitworth College. Although she did not save enough to pay full tuition costs, the GET account made a “huge difference” in the amount the family had to borrow. She has three principles for families saving for college in these tough economic times:
Start early.
Continue to save what you can within your budget.
Don't panic.
“It's still a good deal,” Lochner says of GET. The price of a unit rose from $76 to $101 in May to compensate for steep tuition increases and losses in the investment market. But delaying investing will only result in higher costs later. “We anticipate another big increase in May 2010, at least 14 percent, because that's the amount the legislature has allowed colleges to raise tuition this year and next year,” Lochner adds. “The year after that is a wild card ¬– we don't know what investments will do, and tuition increases may go down to the old average of 7 percent a year.”
“If you have at least four to five years to save – your children are in middle school or younger – you're still in good shape (investing in GET at current prices). There's no way tuition will ever go down.”
What if you lose your job or can't afford your current monthly commitment?
“You can say, ‘Stop,' Lochner explains. “You can adjust the amount you pay in each month, or convert it to a lump sum (which stays in the account, and can be added to as the owner has the funds) or cash it out. It's always your money.”
Other Choices
Prepaid college tuition plans, like GET, are only one way to save for college. 529 college savings plans also allow participants to contribute money tax-free and to avoid taxes on the interest as long as the funds are used for qualified education expenses. You can invest much larger amounts and you choose an investment category – including stock mutual funds, bond funds or money market funds. The value of the plan fluctuates with the market, and is not guaranteed to keep up with tuition costs.
“We are hearing from people who are disappointed in what has happened to their 529 plans,” says Brad Allen, a Bellevue financial planner and current president of the Financial Planning Association of Puget Sound. “This is not new advice, but people are paying more attention to it now: Do not have money in the stock market if you are three to five years from needing it for college. Position your money in safer, more conservative investments.”
Advice varies, depending on the age of the college-bound child. “People with a long time horizon to save may also be gun shy of aggressive investments – more than they should be,” Allen says.
Before deciding how to save, Allen recommends sitting down and figuring out what your life goals are: “Should the child pay for all or part of her own college education? Or is paying for a good college more important than your own retirement?” You should also decide your basic investment strategy, whether it's mostly aggressive or conservative or a mix of both.
A Roth IRA (Individual Retirement Account) might be a good option for some savers. Owners can contribute the money now and have the flexibility to decide later how much to allocate to education and how much to retirement, Allen notes.
“Your tax bracket and other assets are taken into account” in deciding how to save for college, Allen says. “I usually advise people to diversify their exposure and not put everything in one basket.”
Whatever the strategy, “It's always better to start earlier, if you have the ability,” Allen says.
Wenda Reed is a Bothell writer who used GET to save a significant portion of her daughter's college education.
Saving for College 101
There are numerous ways to save for college. Here are some of the most common.
529 Prepaid College Tuition Plans – These are named after Section 529 of the Internal Revenue Code, which created the plans in 1996 and allows your investment to grow tax-free. Many states sponsor these plans, and you or your student must be a resident of the state to enroll. Washington's plan is called the Guaranteed Education Tuition Plan (GET). The state invests the money and guarantees that your investment will keep pace with college tuition inflation. There is no tax penalty when you withdraw the funds, as long as the money is used for qualified educational expenses. You are limited to 500 units (presently $50,500 at $101 a unit).
529 College Savings Plans – These are authorized under the same tax code, allowing tax-free withdrawals of principal and interest, as long as money is used for qualified educational expenses. The account owner decides on investment categories, and the value of the plan rises or falls with the market – allowing for bigger gains or losses. Many educational institutions and states – not including Washington – sponsor these plans, and there are no residency requirements. You can buy a plan directly from the sponsor or through a broker. You may contribute up to $365,000 per student, depending on the plan.
Coverdell Education Savings Accounts (Education IRAs) – These also allow you to withdraw the money tax-free, as long as you are using it for qualified education expenses, for primary and secondary schooling as well as college. These IRAs are only open to people whose adjusted gross income is $110,000 or less ($220,000 if filing jointly), and the value of the account is based on interest earned. Your contributions are limited to $2,000 annually.
UGMA/UTMA Custodial Accounts – These are authorized under the Uniform Transfers for Minors Act (or Uniform Gifts to Minors Act). There are no tax advantages, but you have maximum flexibility to invest as much as you like and to withdraw or transfer the money whenever you like. A broker invests in mutual funds and individual securities, including stocks or bonds, on behalf of a minor. When a child comes of age, he gains control the account and can use it for anything he wants – not necessarily on college expenses.
Roth IRAs – These individual retirement accounts are subject to complex rules as to how much you can contribute at different income levels and how much you can withdraw at different ages. The advantage for college savings is that you can decide where to allocate the savings – to college expenses or retirement or a combination of the two – at a later date. Contributions to a Roth IRA are not tax-deductible. Withdrawals are generally tax-free, but not always and not without certain stipulations.
Resources
www.savingforcollege.comThe helpful site provides an overview and comparison of 529 plans offered by each state, along with performance rankings and a tool to calculate college costs.
www.college savings.org The site discusses 529 plans and reasons to save for college.
Saving for College.com's Family Guide to College Saving 2009-2010 and The Best Way to Save for College – A Complete Guide to 529 Plans, 2009, both by Joseph F. Hurley (Bankrate, Inc.)
