A 529 plan is a state-sponsored savings plan to help parents and family members invest towards their children’s college tuition. Named after the tax code, Internal Revenue Code 26 USC 529, the plan offers two distinct ways of paying for college in the future. The first option is a prepaid plan which allows the purchasing of college credits at today’s prices to counter the growing cost of education and the negative effects of inflation.
The second and more common method is to use a state administered savings plan that uses a mutual fund or financial group to maintain the investments on the end users behalf. Key advantages to this include deductions from state taxes, tax deferred growth, and federal income tax on qualified distributions. Like any investment though there are risks and disadvantages to consider. Stiff penalties are applied for early withdraws or non qualified distributions and the performance of the mutual fund could mean the difference between a full college ride or just some extra cash to help out with books.
Morningstar, an independent investment researcher group rated 64 plans which represent roughly 95% of all the assets held by state 529 plans across the nation. Roughly, $162 billion in total assets. Ratings are based on investment strategies and procedures, qualifications of plan managers and the cost and fee management of the fund. Scores are broken down into five classes, Gold, Silver, Bronze, Neutral, and Negative.
More than half of the 529 plans across the nation were given a Neutral rating. Meaning, they don’t except above average returns or see any exceptional processes to improve investments or reduce costs. Four plans received Negative reviews: Kansas’ Schwab 529 College Savings Plan, Minnesota’s College Savings Plan, Rhode Island’s CollegeBoundfund, and Rhode Island’s CollegeBoundfund. Alaska’s 529 plan received Morningstar’s highest rating, Gold, along with 3 other states.
Alaska’s T. Rowe Price College Savings Plan, managed by T. Rowe Price
Maryland College Investment Plan, managed by T. Rowe Price
Nevada’s The Vanguard 529 Savings Plan, managed by Upromise Investments
Utah Educational Savings Plan, managed Utah Educational Savings Plan
To read more about Morningstar and their latest research report view their press release here. To understand more about the 529 plan I suggest reading it on the US Securities and Exchange Commission website. Alaska’s college savings plan allows for non-resident investments. For information regarding their plan visit here.