(See my update on this topic.)
We have a 529K college savings program set up for my kids through the State of Missouri program administered by TIAA-CREF, soon-to-be Vanguard. Its investment options are turnkey bundles based on age ranges. In the initial years, the investment selection is aggressive. As college-time nears, the portfolio’s mix shifts from stocks to bonds.
The program’s return has varied. From 2000 through 2003, it did poorly, like everything else I owned. The last two years have been very strong, negating those losses and then some. Overall, I’d estimate its average return has been about 6.5% over the period we’ve had it. While not bad for a retirment portfolio (especially during that time period), it is less than college tuition. I really need a way to invest into “tuition futures.”
Last year a good friend of mine mentioned Washington’s Guaranteed Education Tuition program, a self-funded 529 equivalent/alternative.. Participants can buy tuition units indexed to the tuition at the most expensive public school in the state. (From its inaugural year through 2005, the average return was 6.7%.) Each unit is equivalent to one percent of one year’s tuition, with a top limit of 500 units. The proceeds are usable for tuition at any school, though the value is capped at the reference point. If there’s any extra, you can apply it to room and board. I am pretty sure it isn’t usable for art supplies or a kegger block party.
It sounds like a no-brainer, but the devil’s in the details. Because the program’s self-funded, they have differing rates of input and output. For example, tuition units currently cost $66 each, but are only worth $55.06. In effect, there’s a 17% front-end load. Danger, Will Robinson!
I put together a spreadsheet that let me do some ‘what if?’ scenarios to understand how severe the front load is. I made some simplifying assumptions:
- I”m not an actuary – therefore simplifying assumptions are fine.
- GET will continue to appreciate at 6.7%, MOST’s appreciation is less, but constant – because MOST invests in reality-based assets, the value can go up and down and, on average, will trail the increase in tuition.
- GET’s load is constant – the 17% is merely calculated by dividing the current cost ($66) by the current value ($55.06). I applied this to the front-end.
- The initial investment, $1,000, is done once. If you do monthly investments with GET, the units are more expensive in the future. Dollar-cost averaging reduces the growth and volatility of MOST, too. It’s too much to think about this late at night.
- Investments are tax-free, 529 will be renewed — The 529 program has a sunset clause that expires in 2010.
As you can see from the spreadsheet, the timeframe of investment is important. Even though GET has a better average annual return, its front load is a killer in my kids’ timeframe to attend college in 2016 and 2018. MOST wins as long as it can muster at least a 5.2% return. If I had a newborn, GET would be more compelling because of its better return.