How should you invest for college?

I live in Washington State, and in Washington we have two types of state-sponsored programs to save for college. One of them is the GET Program which is like a traditional pension, and one is the Dream Ahead which is a 529 plan.

So which one should you pick?

Well, when considering any long run investment plan what you should care about more than anything else is the probable long run growth. Anyone who has ever played Settlers of Catan (or really any board game involving dice) understands a certain level of probability. If I were to roll a single unweighted six sided die, the distribution curve of  that die roll is going to be completely even, where you are just as likely to roll any integer between 1 and 6 inclusive. This is a perfectly random situation. Now, if I were to roll two dice simultaneously, even though each die is totally random, the sum of those two dice is no longer a perfectly equal distribution. If I roll 100x2d6 (roll two six sided dice 100 times) then I will find that the most commonly rolled number is 7. This is a perfect example of how order can emerge from perfect chaos, where 1d6 is perfect chaos, but by rolling 2d6 does not have perfectly chaotic results.

The economy works the same way. As you keep rolling the same dice enough times, even if you cannot predict every result with 100% accuracy, you can still predict the overall trend in a way which allows you to make an educated decision from the chaos. The 529 plan and any IRA plan use this mathematical fact to provide long-term stability and growth.

The other option is the GET program. The GET Program has the benefits pegged to the current cost of tuition at the University of Washington. For people my age (born in the early 1990s) the GET program was a good deal, because tuition grew significantly when I was in high school. The problem nowadays is that so much tuition is paid for by students nowadays that is about as expensive as getting a grant to a private college in many situations. Tuition is never going to go up as much as it did when I was in high school ever again. This is a good thing. The problem however is that if you go for the GET Program, yes, you have an absolute guarantee that they will cover the cost of tuition, but you are paying  the full cost of tuition today and there is absolutely no guarantee your money will ever gain interest. Hopefully it won’t, because the cost of tuition will stagnate or drop if the legislature does what is good for our state. The GET program is ” guaranteed to keep pace with tuition and state-mandated fees at Washington’s highest priced public university” but this does not mean it is guaranteed to grow. If the legislature do their job to grow our human capital, credits bought in the GET Program will lose value.

At an 8% interest rate, $100 invested in the stock market today will be worth around $370 when a child turns 18. Adjusted for inflation (2% APY) that money is worth $262 in today’s money

When you are buying into the GET program you are gambling that tuition will grow by more than 260% over the next 18 years after inflation. That is the only situation where the GET program is worth it.

When you are buying into a 529 plan you are predicting that tuition is not going to increase as much as the stock market over the next 18 years.

If we look at historical data which is available at the Department of Education‘s website, we find that tuition grew by 165% from 2000 to 2018. We also find that over the last 20 years, the inflation of tuition (after general cost of living) has only exceeded 4% twice over the last 20 years.

For the GET program to be worth it, college tuition will have to grow over 1.5 times faster over the next 18 years than over the last 18 years. If you don’t expect the tuition’s inflation rate to suddenly and imminently increase by over 150%, than you should invest in the 529 plan.

Saving into a plan which has no way to predict how much you might make, which could give you a return of 0% over the future sounds like gambling to me.

Tuition inflation might have been extreme over the last 20 years…

But it still was slower than the growth of the Stock Market.

The mathematics is clear.

Don’t buy into the GET Program.

Save in a 529 plan.

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