Planning for College in Tough Times

When it comes to college, a few thousand bucks isn’t what it used to be.

Eighteen years ago, in-state tuition at the University of Washington was $1,908 per year. Room and board cost $3,150, bringing the total cost to $5,058 for the 1990-91 school year.

Today, annual tuition costs $6,250, a 328 percent increase from 1990, when many of today’s college freshmen were born. Mandatory fees tack on an additional $552, and room and board costs $8,640. The total cost for today’s in-state UW freshman: $15,442.

Families across the nation are facing similar realities when it comes to paying for their children’s college education. The National Center for Public Policy and Higher Education recently found that over the past 25 years, the cost of a four-year degree at a public institution has risen three times faster than the median family income. At the same time, student borrowing has grown twofold.

Coupled with the current economic downturn, these statistics are alarming, for sure.

However, families in our state have many options to plan ahead for their children’s college education. One of these options even provides a guarantee, no matter how high tuition rises.

Planning for College: More Important Than Ever

In the past, families relied on a mix of loans, grants, scholarships and savings to pay for their children’s education, or required kids to pay their own way.

Financial aid alone often isn’t enough. The National Center for Public Policy and Higher Education’s report card for Washington state notes that “poor and working-class families must devote 36 percent of their income, even after aid, to pay for costs at two-year colleges.”

Access to credit, including education loans, has been hit by turmoil in the financial markets. Betty Lochner, director of Washington’s Guaranteed Education Tuition program – a prepaid plan that essentially locks in today’s tuition prices and guarantees that purchased “units” will be worth the same number of college credits down the road – doesn’t anticipate that this will be a long-term problem. “Loans will get more expensive, and you’ll need to take out more,” to cover rising tuition costs, she says.

Scott Smallman, senior vice president of investments at Wedbush Morgan Securities in Seattle, offers another simple reason for parents to plan ahead so that loans aren’t necessary. “The last thing you want is to have your kid come out of college with mega-debt.”

Education Savings Plans

In 1996, the U.S. Congress created education savings plans – naming the investment products 529 plans after the section in the Internal Revenue Service Code – that allow families to plan ahead for their children’s college expenses while realizing tax advantages. All 50 states offer some type of 529 program. Many allow nonresidents to participate in their plans, while others, including Washington state, restrict participation to residents only.

Families make post-tax contributions to a 529 plan as their children grow up. The funds, including investment gains, are withdrawn tax-free down the road to pay for tuition, books and other education-related expenses, including room and board.

Not all 529s are created equal, though.

529 College Savings Plans

Most 529s are considered “college savings plans” with contributions that are invested in stocks or mutual funds, much like 401(k)s. States often contract with financial services firms to manage these accounts, the value of which is tied to the markets. Savings plans may charge asset management fees in addition to enrollment and other annual fees.

529 Prepaid Tuition Plans

Prepaid tuition plans are another type of 529 plan. Unlike college savings plans, families invest in the current price of tuition, paying today’s prices for their child’s education in the future. Families lock in tuition by purchasing “units” based on current costs at in-state public universities. Fees include enrollment and built-in administrative costs.

In Washington’s Guaranteed Education Tuition prepaid plan, or GET, families buy units, with each unit worth one percent of the current cost of a year’s tuition, plus administration fees. One hundred units equal a full year of in-state tuition. The value of a unit increases automatically as tuition rises.

Nineteen states offer prepaid tuition plans; of those, only five offer a guarantee. GET is one of those five.

Lochner says that states like Washington view guaranteed plans as a benefit to their residents. Many states are unwilling to take on the financial responsibilities of a prepaid plan. A few others have had to limit their prepaid tuition plans after low enrollment combined with double-digit tuition increases stressed program resources.

Prepaid tuition plans do not limit your child to in-state schools or even public universities. The value of your units, however, will be determined by tuition at our state’s public universities, not on the cost of the school your child attends.

For instance, one hundred GET units may be enough to pay for two years of tuition at a community college, while they may only cover one semester at a private university.

Smallman says the GET program is vastly superior to most other 529s. “We’re fortunate that our state offers something unique that you can’t get elsewhere.”

A Safe Investment Option in Uncertain Times

Over 93,000 Washingtonians participate in the state’s GET plan.

In early December 2008, more than 2,100 new families had signed up for GET accounts in the current open enrollment period – a small increase from the same period last year, according to Lochner. Most accounts are for children who are learning to sit up or walk right now, with college 15 to 18 years away, she says.

Despite the dour economy, the program is fiscally strong, Lochner says. In June, the GET portfolio exceeded $1 billion and had an 11 percent surplus. Program funds are managed jointly by the GET Committee and the Washington State Investment Board.

Recently, the plan’s investments have been impacted by Wall Street volatility; however, Lochner points out the plan won’t be paying most participants’ tuition for another 10 to 18 years. “Our new enrollments help cover our current bills,” she says, noting that the plan is designed to handle bumps in the road.

The GET program is also buffered from deep state budget cuts. “GET is self-sustaining,” says Lochner. “We don’t receive any dollars from the state general fund.”

What if the economic doldrums stick around or grow worse? The same law that guarantees the state will cover participants’ tuition costs if the plan, itself, cannot, also includes clauses for limiting participation or refunding GET units at their current value should the program become unsustainable.

Lochner says GET is nowhere near that point, though. “It would take 10 to 15 years of bad economic storms before this would be a possibility.”

What Families Are Doing Today

In the past few months, Smallman says, he’s not had any clients opening new college savings plans. “Right now, people want to maintain liquidity that is not committed, for instance in a savings account, that will be available in case they lose their job.”

At the same time, he is not seeing evidence of panic, such as families pulling money out of existing plans. Smallman’s advice to families who have 529 plans or other investments for their children’s education is to continue current strategies and not deviate from them.

Over at GET, Lochner is seeing a different trend. Applications during this year’s open enrollment, which began Sept. 15 and runs through March 31, 2009, are up about 1 percent from last year.

The GET program also saw a 55 percent increase in rollovers from other market-based college savings plans in the first ten months of 2008, compared to the same period in 2007. Lochner doesn’t encourage this approach, saying it locks in losses from the other plans. However, she understands that many families are becoming nervous and want a guarantee that their children’s education will be covered.

Lochner anticipates a flood of new applicants if the state lawmakers remove the 7 percent annual tuition increase cap in this year’s legislative session. This would allow state universities to raise tuition, perhaps by as much as 20 percent, to offset budget deficits. The price of a GET unit would remain at $76 for the current open enrollment cycle, but then would increase next fall to match the tuition hike.

Lochner has watched this happen before. When the state hit a recession in 2001, the Legislature allowed a one-time 16 percent tuition increase to help universities stay afloat. The cost of GET units rose by 24 percent in the next open enrollment cycle to cover the unanticipated shortage and catch up with tuition.

Saving When Every Dollar Counts

College savings programs and prepaid tuition plans offer families flexible options for college planning, even when times are tough.

How do you determine which 529 plan is best for you? As a first step, you may want to consult with a financial planner who can help with particular saving goals. Smallman suggests asking friends or other parents at your child’s school for recommendations, if you don’t already have a planner.

There are also many good Web sites that provide calculators and side-by-side comparisons of state 529 plans, Here are a couple of good examples, plus some other helpful sites:

College Savings Plan Network: A great starting place for those who are new to the college savings scene, this site provides easy-to-understand information about 529 savings plans. The network is an affiliate to the National Association of State Treasurers. www.collegesavings.org.

Bankrate’s Saving for College: This site offers convenient tools, calculators and comparisons of state 529 plans, along with current news on the college savings front. www.savingforcollege.com.

Measuring Up 2008: The National Report Card on Higher Education: The National Center for Public Policy and Higher Education report on current issues in higher education at the national and state level includes detailed data on college costs, educational attainment and other measures. http://measuringup2008.highereducation.org.

Washington State Guaranteed Education Tuition Program: Find information, tools and enrollment materials for Washington state’s 529 prepaid tuition plan here. Open enrollment runs from September 15, 2008 - March 31, 2009. www.get.wa.gov.

Denise Gonzalez-Walker is a freelance writer and mother of two children, ages 4 and 10.