There are only 5 states that offer a 529 prepaid plan vs. the 529 savings plan.
Washington State is one of them.
So I definitely get this question: ‘Which is better? Prepaid or Savings?’ (Actually it’s usually phrased ‘GET or 529?’)
The accurate definition is prepaid vs. savings.
It’s useful to start this conversation at a higher level before proceeding with a risk/benefit analysis of each.
GET = Guaranteed Education Tuition = 529 Prepaid Tuition Plan
Think of a GET as a plan where you buy a future education credit at today’s prices. The promise is that the credit will keep up with the cost of tuition. The funds you pay into the program are managed by a trust. You don’t manage the money yourself, the state does.
This is very similiar to an employer sponsored defined benefit plan, where the trust manages the money for the recipient as opposed to the recipient managing the funds, and the trust then pays the funds out at a future date.
529 Savings Plan
I suspect you already know about this type of 529. Your money goes into your own account and you direct how it gets invested. You are 100% responsible for managing this account and for ensuring that the right investments are chosen for your timeline and the growth you need.
So, sounds like a GET is a slam dunk, right?
It’s not as easy as that: You still rely on the state to manage and fund the trust adequately.
While it’s highly probable the State of Washington will continue to manage the trust well and fund it appropriately, there is always the risk that it may not.
Even though the word “Guaranteed” is part of this plan, it is within probability, albeit remote, that the state may not fund it properly and the credits may not cover the cost of education to the extent promised (for example, a credit/unit may not keep pace with the cost of tuition if your child decides to go to a school in another state or a private school).
So essentially the question becomes: Are you comfortable with not having future control of these funds? Are you comfortable knowing that a 529 Savings Plan may perform better?
The tradeoff becomes one of limiting the downside at the cost of limiting the upside.
For alot of people it may make more sense to have both; that way you may be able to get the best of both worlds: The assurance of the GET for keeping up with WSU/UW tuition and a 529 Savings Plan to capture the upside of growth, as well as to have funds better cover your child’s expenses if they decide to go out-of-state or private school.
While the Washington State GET 529 can be used for many out-of-state or private schools, the credits may not cover the costs to the same extent as they would for WSU/UW.
(Disclosure: I am a Fee-Only Financial Planner. My website is here.)