State’s future tuition program caught in conundrum

Contributing WriterFebruary 13, 2013 

Only make promises you can keep.

That’s good, solid advice. In light of what we now know about Washington’s embattled Guaranteed Education Tuition (GET) program, we might modify that to something along the lines of “Only make promises you won’t regret keeping.”

The good thing about GET is that it reduces the financial uncertainty associated with college by allowing anyone to pay for tuition at a set price today, and receive the value of tuition – whatever that might be – tomorrow. In this way GET has helped many Washingtonians plan for the expense of college.

In theory, GET enrollees’ contributions generate investment returns that cover future tuition increases. By reducing the uncertainty of one’s tuition payments in the future, GET works like an insurance plan because it makes an unknown cost known. And so it helps families plan for college – all without public subsidies. What’s not to like?

Reality is what. The theory behind GET hasn’t worked out so well. Investment returns have been down while tuition has shot up. Two years ago, GET fell $250 million below the self-funded benchmark, a gap proponents at the time dubbed “theoretical.” But today the shortfall stands at $631 million – half what the state spends annually on higher education.

While in theory a great idea, GET (and other state prepaid tuition plans for that matter) have been problematic. Despite its claim to being a “middle-class program,” GET’s features target upper-middle-class households. A plan that truly targeted middle- and working-class citizens wouldn’t look like GET.

A more important shortcoming is the insurance analogy.

Providing insurance makes sense when the provider is pooling predicable risks that affect some but not most. If one out of 1,000 drivers crashes a car, you can figure out what to charge each driver so that you don’t take a loss. Insurance isn’t possible where disaster befalling one person also befalls everyone else: The insurer would go bankrupt.

From an insurance standpoint, the problem with GET is that you can’t pool risks. If tuition goes up for one GET enrollee, it goes up for every one of them. With GET, the state is not pooling its citizens’ risks in a predictable fashion; it is accumulating them. The program has thus resulted in the state budget taking on much more financial risk than it should.

A final problem with GET is what we now see: A program that enrolls a small fraction of the state’s citizens is now driving higher education policy.

GET’s current deficit could disappear if several things occur. Most obvious are higher investment returns and smaller tuition increases.

But the state is also counting on new enrollees, as it has built its deficits into the price it now charges. As GET itself explains, state subsidies aren’t needed “as long as (GET) continues its current enrollment plan.” A Feb. 7 Viewpoint in The News Tribune similarly argued for the continuation of GET because “the risks are greatest if the program is closed to new enrollments today.” If GET needs new enrollments to keep it going, it is not self-funded.

I don’t know what will happen with investment returns, but I do know it’s folly to hope for both low tuition growth and more enrollees. The state is trying to achieve the first by pressuring higher education institutions to maintain current tuition levels. Higher education is happy to comply if in return the state provides it with the ample funds it needs.

New investments in higher education may now become driven by the state’s financial need to limit tuition inflation. A backhanded way to a good outcome, perhaps? But think about it for a second.

Citizens enroll in GET precisely when they expect high tuition in the future. The uncertainty and added costs that result make parents eager to nail down today the future price of college. But if the state commits itself to modest tuition increases, GET won’t secure the enrollees it’s counting on.

So GET has our legislators in a bind. Lower future tuition is expensive, but makes promises made to current GET enrollees more affordable. Yet it is higher future tuition that attracts the enrollees the state hopes will help GET’s bottom line. Assuming both low tuition growth and high enrollment defies logic.

Such is the conundrum that GET has created for us.

Katie Baird is an associate professor of economics at the University of Washington Tacoma. Email her at kebaird@uw.edu.

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