Stashing money in a tax-advantaged 529 plan may be the smartest way to save for college. Yet which college savings plan you choose to stash that money in can also affect how much you're able to save.
Investment firm Morningstar's annual rating of college savings plans highlights four gold plans. Two—Nevada's Vanguard-managed plan and Utah's Educational Savings Plan—are long-time standouts, while another, in Illinois, jumped to gold after getting a new manager, enhancing its age-based asset allocations, and lowering costs, according to the report. One of Virginia's two popular plans earned the fourth gold rating. (See the top rated plans below.)
Overall, there are 34 plans that Morningstar considers "best-in-class," by awarding them either gold, silver, or bronze ratings. That means Morningstar analysts expect those plans to outperform others in the market over the next few years. The ratings are based on plan management, investment options, staff oversight, past performance, and cost.
College savings plans have been around for two decades, but uptake among families has been slow. The accounts are like IRAs for college: earnings grow tax-free. Plus, if you spend those earnings on federally approved college costs, you can withdraw tax-free as well.
As a whole, the report says the 529 industry continued to improve over the past year, with multiple plans lowering fees and improving their age-based investment tracks. Experts recommend investing aggressively in stocks when your child is young and then shifting to the lower-yielding, but less risky bond market as your child gets closer to college age. Those plans, until recently, have had large, clunky steps to transition from one to the other — but more plans have smoothed the transition, making it more gradual, says the report's author Leo Acheson.
Nearly three-quarters of the medal-rated plans are direct sold, meaning you can open them directly with your state. Nine are sold by financial brokers or advisors.
Every state except Wyoming offers at least one college savings plan. You're not limited to your own state's plan, though more than 30 states offer a state tax benefit for those who invest in their home state. The Morningstar ratings, along with ratings from SavingforCollege.com, can help you determine where to invest your college savings.
In addition to Morningstar's 34 plans that received medals, 26 plans earned neutral ratings. That means they're not exceptional, but there's also nothing that worries Morningstar about the plans, either. And in fact, some of these neutral plans may still be a good choice for in-state residents because of unique benefits, such as local tax breaks. Two plans—New Jersey's Franklin Templeton 529 College Savings Plan and Arizona's Ivy Funds InvestEd 529 Plan—earned negative ratings. This year, the firm upgraded six plans and downgraded three.
Morningstar evaluated 62 plans, which account for about 95% of the $250 billion invested in 529 plans.
Morningstar's Top-Rated 529 Plans
|Bright Start College Savings||IL||Gold|
|The Vanguard 529 College Savings Plan||NV||Gold|
|Utah Educational Savings Plan||UT||Gold|
|Bright Directions College Savings Program (Advisor)||IL||Silver|
|CollegeAdvantage 529 Savings Plan||OH||Silver|
|CollegeCounts 529 Fund||AL||Silver|
|Maryland College Investment Plan||MD||Silver|
|Michigan Education Savings Program||MI||Silver|
|MOST Missouri's 529 Plan||MO||Silver|
|ScholarShare College Savings Plan||CA||Silver|
|T. Rowe Price College Savings Plan||AK||Silver|
*Plans are direct-sold unless noted as an advisor plan.