The Best & Worst of College Savings Plans

There have been some significant recent developments affecting 529 college savings plans, with substantial changes in state and federal tax benefits that should serve to increase the appeal of the plans. The most notable change was the Pension Protection Act of 2006, which made permanent an investor’s ability to withdraw earnings from 529 plans, free of federal taxes, for qualified college expenses. Prior to passage of the PPA, federal tax breaks on 529 plan earnings were set to expire at the end of 2010. Additionally, many states are maintaining a trend toward lower fees on the plans, according to Morningstar, which just released its annual rankings of state 529 plans. For example, Wyoming and South Dakota’s Core4College, a high-priced plan, has been eliminated, and the arrival of lower-cost options and fee cuts at other plans has provoked price competition among the states.

So, which plans are best? Which should investors stay away from? Morningstar has sought to provide some guidance by issuing its ranking of 529 plans, building its best and worst list around such characteristics as the quality of underlying investments, the flexibility of the investment options, clarity of the program disclosures, and the investment managers’ record of treating shareholders well (based on Morningstar’s Stewardship Grades), among other traits. Following are Morningstar’s top five and bottom five plans, based on those criteria.

The Best List:

The Maryland College Investment Plan run by T. Rowe Price

The Utah Educational Savings Plan from Vanguard

Nebraska’s College Savings Plan administered by Union Bank & Trust

Virginia’s CollegeAmerica from American Funds

Colorado’s Scholars Choice Steady of Legg Mason