Modifying Custom Monthly Plans

I asked these questions from GET plan administrators and got the following answers:

Question: Is there any penalty for designating an early benefit use year (other than the 10-year forfeiture clause)? Is there any reason why I wouldn't designate a benefit use year earlier than when I expect my daughter to go to college (eg in case she goes to college early for some reason)?

Answer: You can assign your student’s benefit use year earlier than she is scheduled to go to college without penalty. At any time you can change the benefit use year by completing a form, so that the student can use the units earlier if needed. You’d just need to make sure that either 1.) the units have been held two years in the account and, or 2.) the custom monthly plan is paid in full.

Question: Are Custom Monthly Plan modification requests automatically granted (assuming they are agree with the Master Agreement)?  If not, what determines which requests are granted?

Answer: You can adjust the terms in your contract at any time, according to the rules in the master agreement.

Question:  If I reduce the total payment term from 10 years to 5 years, is interest due on years 5-10?

Answer: If you were to reduce the terms from 10 to 5 years, you are only responsible for paying the finance charges on the 5 years.

I was struck by then answer on modifying the terms.  If you were to stop paying without requesting the modification, the penalty is rather harsh. From the agreement:

If a Custom Monthly Payment Plan is not in good standing, the Program may declare a conversion of the Account.  Monthly payments on a converted Account will be used to purchase paid-in-full Lump Sum Plan Units at the prices in effect on each payment date. After conversion, only Lump Sum Plan Units may be purchased in that Account.   

So, long story short -- if you decide to stop paying the Custom Monthly Plan payments convert it instead!

State Actuary Report on GET Solvency

At the January 29, 2010 Higher Education Coordinating Board (HECB) meeting, the State Actuary presented their report on the solvency of the GET Program.

I thought the Actuary's description of the 'Perfect Storm' challenges was great:

Weak economies and strained budgets create pressure to increase college tuition. Increases in college tuition mean a higher payout value for GET units. When GET experiences losses due to low investment returns or unexpected tuition hikes ... the GET committee must set higher prices for new units...the units could be priced so high that there are not enough willing buyers to provide the proceeds needed to keep the fund healthy.

Market and tuition volatility can wreak havoc with the GET unit price and hence, prepaid tuition plan solvency. This dynamic pattern can create "perfect storms" that occur not just once or twice but many times during the life of the program.

And this graph relating recessions, to state higher-ed funding, to student tuition was also illustrative.  Basically recessions mean states fund schools less and therefore tuition increases.

The State Actuary ultimately assesses that there is a relatively small likelihood that state contributions will be required over the next 50 years.  However, while that likelihood is small, dollar amount could be quite significant.

The Actuary goes on to recommend that the tuition growth assumption should be raised from 7 to 7.5%.

529 Program Recovery

I just stumbled across this Seattle Times article from August.

Program assets dropped from $1.04 billion at the end of June 2008 to $769 million at the end of February 2009. The fund was back up to $1.07 billion by the end of June 2009.

As it turns out, 2/3 of the funds invested in 2009 came in during the last few weeks of April.  This timing aligned nicely with the start of the now year-old bull market.

Of course, we don't know how much of the $1.07 billions is represented by investments vs. recovery of prior investments.  The plan may still remain underfunded, but likely less so.

2010 Enrollment Deadline Approaching

The deadline for new enrollments in 2010 is March 31.   Payments for purchases then need to be received (not postmarked) by April 30.

UW tuition is expected to rise again for the 2010-2011 year by about 14%.  The GET Plan will likely need to increase the unit price at least by that amount. Increases or decreases to the unit price will be driven to the size of the GET Plan reserve.  The market's rebound since hitting its lows in March 2009 should have rebuilt the GET Program's reserve, however minutes from recent GET Committee meetings are not online yet.

WA Tuition Setting bill dies in House Committee

The House version of the tuition setting bill that was passed by the Senate in Feburary died in a House committee.  The Seattle Times reports:

The hotly debated bill, SB 6562, had earlier passed the Senate 29-19 in a vote that split lawmakers along ideological, rather than party, lines. But the bill ran out of gas in the House Higher Education Committee, where it was opposed by committee chairwoman Deb Wallace, D-Vancouver.

Neither the Senate bill nor a series of alternatives offered up by Wallace and others appeared to have enough support to pass out of the committee. So after two hours of public debate, Wallace adjourned the session without taking a vote.

Still, a 14% tuition increase is expected in the Fall, and the bill isn't likely to be completely dead just yet:

Western Board of Trustees Chair Phil Sharpe spoke in favor of the bill at the committee hearing on Tuesday.  He said the bill did not have much chance in the House to begin with, as Wallace was not in favor of local tuition-setting authority.  

Sharpe said while the bill is likely to not move from the committee, he expects Washingtonians have not seen the end of this bill.

“I suspect this issue has enough support it won’t dry up and go away,” Sharpe said.  “I suspect if it’s not pulled, it will be back again next year in legislation.”

WSJ Article on Prepaid 529 Plans Falling Through on Promises

The Wall Street Journal has a very good article on the troubles currently experienced by pre-paid tuition 529 plans. The article focuses on the problems in the Alabama plan, however this quote is particularly poignant:

Across the nation, college prepaid plans are operating in the red, putting their promises to investors like Ms. Lambert in jeopardy. For now, the states still are paying tuition as they agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts.

To be sure, the Alabama plan is not one of the plans backed by the full faith of the state government, and the article focuses on the problems with their investment fund and the expectations that some investors had that the state would back the plan.

The WSJ article identifies only 5 states that have plans backed by the state government (unlike the six we identified)

The article does make a specific reference to the Washington State Plan:

Washington expects prices for its prepaid plan to increase by at least 14% this fall—in step with tuition increases.

While the law allowing state universities to raise tuition faster than their legislated maximum of 7% has yet to pass, it does look likely to pass and it is reasonable that UW would raise tuition by an amount far exceeding 7%.  As mentioned before, this law would have a substantial impact on the value of an investment in the plan.

WA Senate OKs limited tuition increase bill

The Washington State Senate approved a bill on 2/15 that would give a limited set of state universities flexibility to raise tuition at a higher rate than the 7% mandated by state law.  The WA State Democrat blog has a good summary:

The tuition-setting authority embedded in the bill is contingent upon several limiting factors. It would only be granted for six years beginning with the 2011/12 academic year. A tuition increase in any given year could not push the compounded annual increase over the previous 15 years beyond 9 percent. And in-state student tuition could not exceed the 75^th percentile of resident tuition at peer institutions identified in state law.

Basically, this means that UW can raise tuition for the next 6 years. They can make multiple big tuition increases, but over the long run those increases can't average more than 9% (yes, average is not perfectly correct, but it is a simplified way to explain the provision).

This suggests that UW will probably aim to raise tuition next year at the 14% level they have been pursing.

The bill now heads to the House.