We assign a rating to each state-sponsored
program ranging from one cap (least attractive) to five caps (most attractive).
The 5-Cap Rating represents our opinion of the overall usefulness of a state's
529 plan based on many of the considerations described in Joe Hurley's book "The
Best Way To Save For College - A complete Guide to 529 Plans".
The 5-cap rating is not strictly a measure of historical returns and it is not a predictor
of future investment performance, level of investment risk, or financial solvency
of the program funds. For more information on the criteria used in assigning a 5-Cap
Rating, click on any 5-Cap Rating graphic.
The "5-Cap Ratings" represent our opinion of the overall usefulness
of a state's 529 plan based on the many factors that we feel are important.
These ratings are not the result of a fixed formula.
Below you will find a brief description of some of the criteria we use in assigning
a 5-Cap Rating. It is important to note that any particular individual would
likely weight these items differently based on his or her own circumstances
and preferences. For example, some 529 plans are more restrictive in their eligibility
requirements (age, grade level, etc.) than we like to see, and that may impact
their ratings. If you meet the requirements of the program you are investigating,
however, then this factor will not be relevant to you in your situation.
Before establishing a 529 account and making contributions, it is imperative
that you read and understand all enrollment materials and disclosures from the
program that interests you.
One last note about resident ratings versus non-resident ratings:
Separate ratings are presented because many states offer special incentives
or benefits to their state residents who invest in their 529 plans. Please be
sure to refer to the official program disclosure materials to determine who
qualifies for a "Resident" account. You may not live in a state but
still qualify for a resident account when, for example, your beneficiary lives
in the state or perhaps because you work in the state.
What the ratings mean...
The Internal Revenue Code allows a tremendous amount of flexibility to participants
in a 529 plan. Although there can be valid public policy reasons for any restrictions
imposed by state law, we appreciate it when states incorporate this flexibility
into the design of their plans.
We like to see:
We don't like to see:
We like to see:
Section 529 is clearly designed to put the account owner in control of the
account. A state's 529 plan should support this approach. The beneficiary
should not have rights that properly belong to the owner.
Many of the states that trumpet the benefits of their 529 plans are willing
to back up their words with additional state-level benefits. Others do little
or nothing (which in the case of a savings plan may make us wonder "why
bother to have one at all?").
We do not presume to know which investments are going to provide the best overall
return. But an investment approach is certainly one of the primary considerations
for anyone investigating 529 plans.
There are many unique issues that arise in the design and administration of
a 529 plan. It is important that the state agency or third-party program manager
responsible for the 529 plan devote the resources necessary to ensure complete
disclosure, smooth operation and the fullest possible compliance with the law.
This is not an easy task, but skimping here is asking for trouble in the future.
Effective July 1, 2006, prepaid tuition plans receive the same federal financial aid treatment as 529 savings plans. It used to be much worse for prepaid tuition plans in the aid formula, and the 5 Cap Ratings reflected that disadvantage. Accordingly, federal aid treatment is no longer a factor in the ratings. Some state-funded aid programs grant favorable treatment for participants in the in-state 529 plan, and that is still considered in the ratings.
We assign a rating to each state-sponsored program ranging from one cap (least attractive) to five caps (most attractive). The 5-Cap Rating represents our opinion of the overall usefulness of a state's 529 plan based on the many factors that we feel are important. These ratings are not the result of a fixed formula. The 5-cap Rating is not strictly a measure of historical returns and it is not a predictor of future investment performance, level of investment risk, or financial solvency of the program funds.
The 5-Cap Rating and other information we provide are for information, education, and entertainment purposes only. You should not construe any Information, features, tools or other content available through this Web site as legal, tax, investment, financial, or other advice. The 5-Cap Rating and other information is broad in scope and does not consider your personal financial situation. Your personal financial situation is unique and the information and advice may not be appropriate for your situation. Accordingly, before making any final decisions or implementing any financial strategy, we recommend that you obtain additional information and the advice of your accountant and other financial advisors who are fully aware of your individual circumstances. You assume the sole responsibility of evaluating the merits and risks associated with the use of the 5-Cap Ratings and any information provided on this Web site.
In exchange for using this Web site, you agree not to hold Bankrate, Inc. liable for any possible claim for damages arising from any decision you make based the 5-Cap Ratings and any information provided on this Web site.