By Luke Minor, Director, Washington State’s College Savings Plans (WA529)
April 2, 2019
“What’s a prepaid tuition plan? Is that as good as a 529 plan?”
“We’ve heard about these prepaid tuition plans, but we went with a 529 plan instead.”
Despite our efforts as an industry to remind the public that prepaid tuition plans are, in fact, 529 plans, we continue to combat the perception that these are fundamentally different and potentially inferior college savings vehicles. Over the years, concerns over this misconception have continued to bubble up in conversations among my CSPN colleagues, at industry conferences, and in several posts on this blog.
This concern is understandable, especially for states such as mine that administer prepaid plans and continue working to keep them on a level playing field with savings plans in the 529 marketplace. Both the college savings and retirement spheres continue to steer away from defined benefit programs that can pose substantial future liabilities to states and organizations in favor of savings and investment vehicles that transfer investment risk to participants. Today, less than 25% of states still offer a prepaid college savings option, and according to a recent Pew study, just 10% of adult workers participate in defined benefit retirement plans.
In Washington state, our prepaid tuition program and its participants have weathered significant turbulence in recent years due to a wild ride on the state’s tuition policy roller coaster, coupled with fallout from the Great Recession. Fortunately, our program has recovered and maintained a healthy funded status. Additionally, the Legislature has recently renewed their commitment to the program’s future viability while negotiating a bill last year that could have dealt a crippling blow to the program. A year later, we are potentially in the best position we’ve been in, as we have come out the other side with a still viable prepaid plan, along with (at long last) another set of 529 options for Washington families in the form of a new direct-sold savings plan.
As these events have transpired, I’ve been pondering a couple of questions – should my fellow prepaid plan administrators and I really be getting so hung up on semantics and trying to convince folks of the ways in which 529 prepaids are the same as 529 savings plans? Or, should we double down and focus our energy on reinforcing the unique qualities that make prepaid plans so special?
On the one hand, we don’t want to add another layer of confusion for families who are already overwhelmed by competing financial priorities, advice, and options. Savers can get stuck trying to find the 529 plan that best meets their needs. Getting lost in unpacking the nuances between the different 529 flavors can delay decisions on getting their savings started.
On the other hand, prepaid plans bring a truly unique (and increasingly rare) opportunity to the table for families who have the chance to fully understand them (and have access to them). They are a special tool that can aid risk averse savers, families who want to hedge against tuition inflation, or those who just want added diversity in their college savings portfolios.
Our recent experiences in Washington have reinforced the continued value and interest in these special programs. At almost every community event we’ve attended over the past several years, even during the times of greatest turbulence, we’ve met current and former participants who say our 529 prepaid tuition program is one of the best decisions they ever made. While prepaid plans are by no means the perfect vehicle for every saver, nor are they destined to be a staple on every state’s 529 menu, I’m confident they will still have a special place at table for years to come.
About the Author
Luke Minor is the Director of Washington State’s College Savings Plans (WA529), which include the GET Prepaid Tuition Program and the DreamAhead College Investment Plan. Tens of thousands of students have already used more than $1 billion of their WA529 savings to attend colleges in all 50 states and at least 15 foreign countries.