Thursday, December 20, 2007

Standard Deviation and Funding the Cost of College

The cost of a college education continues to increase faster than the cost of living.

Here in Washington State, tutition costs for the University of Washington (UW) and Washington State University (WSU) have increased an average 7.1% over the last 15 years. (If I was smarter at this 'puter stuff, I'd insert the chart you can see at: http://www.get.wa.gov/documents/get_increase07.pdf).

The US Consumer Price Index (CPI) for the same period averaged +3.9% (derived from CPI data at http://stats.bls.gov/).

Tuition increases got so out of hand here in Washington - +16% in 2002 - the Legislature passed a law limiting annual increases to 7% (until 2017). Guess how much tuition has increased each year since then (see the chart above)?

So what's the best way to pay for college?

Like we say a lot in the financial planning business - "That depends." But we can talk about that some other time. Our purpose today is to illuminate the standard deviation of college funding as it relates to the cost of college.

Standard deviation is a mathematical construct that measures the variation of an event over time around its average variation. In the investment world, standard deviation is used to measure risk - or the variation of the return of an asset over time around its average return. I usually explain it as the difference between the return you received on an investment compared to the return you EXPECTED to receive on the investment.

When planning for college expenses, the big question goes something like this: "How can I be sure the choices I make today will cover the costs I expect tomorrow?" The short answer is "You can't".

But - you can get close if you accept the premise that the cost of tuition in Washington State (UW, WSU) will be representative of the cost of tuition for your student, wherever they choose to attend. Check out the cost of tuition at schools around the country: http://collegesearch.collegeboard.com/search/index.jsp?s_kwcid=college%2520costs902529284

If you accept the premise that the cost of tuition in Washington State (UW or WSU) will equal the cost for your student, the Washington State 529 Prepaid Tuition Plan - Guaranteed Education Tuition (GET) should be your first choice. Why? Because the standard deviation of the GET program, vis a vis future tuition costs at UW or WSU is - for all practical purposes - ZERO. The State of Washington guarantees - with the "full faith and credit" of the State - that each GET unit will buy an equal amount of future tuition regardless of the future cost of tuition. The GET units you buy today will return exactly what you expect in the future - even though we don't know today what that will be.

The State considers the GET program to be such a "good deal" - i.e., the State is on the hook - that they limit purchases to 500 units per child (100 units equals one year's tuition). Two final words: either the GET account owner (mom, dad, grandparents, other relative) or the account beneficiary (student) must be a resident of Washington State at the time the account is opened, and, you are not limited to attending a school located in the state - if the student attends out of state, the GET units are converted into cash at the then equivalent tuition.

Enrollment for the GET program is open from September to March each year. The current cost of each unit is $74. Website: http://www.get.wa.gov/index.shtml

Questions? kimm@sweetwaterinv.com

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