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Tue April 12, 2011
Alternatives to the GET program
How to pay for your children’s college tuition can be complicated. Washington state's Guaranteed Education Tuition (GET) program has been very popular, with about 130,000 families taking advantage of it. But there have been concerns about the long term financial viability of the program, and the legislature is considering changes. For those not already in the program, what the state agrees to cover may be less than what it pays for current enrollees. In light of this uncertainty, financial commentator Greg Heberlein thinks it’s a good time to point out the alternatives.
A normal brokerage account. An advantage is you control the investment entirely. A drawback: normal accounts mean taxes on gains. GET plans are tax-free when applied to college tuition.
Roth IRAs allow owners to take back original contributions for any purpose, including college. If a child doesn’t go to college, GET plan withdrawals are taxed and fined. Not so with Roth IRAs. But building enough cash after paying the tax upfront may be a burden.
Coverdell accounts, once known as educational IRAs. These are tax-exempt plans for almost any school expense, from kindergarten through college. But with deposits limited to $2,000 a year, it will be hard to cover much of inflationary tuitions.
Treasury inflation-protection bonds, known as TIPS. Those bonds rise in value based on the consumer price index. A variation is zero-coupon Treasury bonds. They allow the buyer to pay discounted prices for bonds that add in interest each year. A $1,000 bond maturing in 15 years costs less than $500 today. But they are taxable, so the parent needs to open a simple custodial-trust account in the child’s name. Taxes are avoided as long as the child’s income remains low.
Insurance companies offer plans, but they usually carry fees and commissions that make them less attractive.
The bottom line? Even with its susceptibility to change at the hands of state lawmakers, Greg thinks the GET program is still a pretty good deal.