5-Cap 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 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.

Program Details

5-Cap Ratings Criteria

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...

This is a program that offers outstanding flexibility, attractive investments, and additional economic benefits (such as generous state tax incentives) that for some people, at least, will provide a substantial boost to their savings. There are few, if any, weaknesses noted in the program.
An excellent program with many benefits for the participant and positive investment attributes. If it has any significant weaknesses then it also has some particularly good things to recommend it.
A very good program that offers valuable benefits but may have some limitations or concerns that investors need to be aware of.
A program that will work for many people who fit the "target" profile but that contain potentially significant problems or uncertainties that can hurt the unsuspecting investor.
A program that contains too many unnecessary restrictions, uncertainties, investment downsides, or other problems so that changes are necessary (in our opinion) in order for the program to compete effectively against other alternatives.
Another similar program is offered in this state that is more appropriate in all cases.
This program is not open to you either because it has residency requirements or because it has stopped accepting new enrollments.
This is a recent program and has not yet had a 5-Cap Rating assigned.

Flexibility

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:

  • High contribution maximums and low minimums
  • Wide eligibility standards for both account owners and beneficiaries
  • Ability to use account for all qualified higher education expenses including graduate school, whether billed directly by the institution or not
  • Maximum latitude in changing beneficiaries
  • The ability to make non-penalty rollovers to other state 529 plans

We don't like to see:

  • Time limits on how long an account can stay open
  • High school students being excluded by maximum grade/age limits
  • Adults being excluded by maximum age limits

Liquidity and Availability

We like to see:

  • The ability to use the account right away for college expenses
  • Easy deposit and withdrawal procedures
  • The ability to take partial non-qualified withdrawals without terminating the account

We don't like to see:

  • The inability to get your money back out at any time without having to beg for it
  • Penalties or fees on non-qualified withdrawals or rollovers

Ownership Rights

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.

We like to see:

  • An account owner have the ability to transfer ownership to someone else at any time
  • The ability to name a successor owner on the application in the event of the account owner's death

We don't like to see:

  • A beneficiary have any control over the owner's desire to change the beneficiary, request a refund, or make other changes
  • Automatic assignment of ownership to the beneficiary in the event of the account owner's death

State Benefits

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 like to see:

  • State tax deductions for contributions
  • State tax exemption for earnings used for college
  • Resident tuition prices offered to prepaid contract beneficiaries who later move out of state
  • Exclusion of 529 accounts from consideration in state-funded financial aid programs
  • Any extra perks: matching grants, loan programs, etc.

We don't like to see:

  • A complete lack of the above

Investment Approach and Safety

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.

We like to see:

  • Well-designed investment strategies and highly rated portfolios
  • As much choice as possible
  • State guaranty of prepaid tuition contracts
  • Downside investment protection
  • Age-based discounts on prepaid tuition contracts
  • Low fees and expenses

We don't like to see:

  • Downside risk when there is little upside potential
  • Forfeiture of earnings on a refund
  • Prepaid tuition contracts that tack on a big premium to current tuition costs
  • Investment returns diminshed when the student goes to a private or out-of-state college

Program Resources

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.

We like to see:

  • Thorough and complete program materials that evidence careful plan development and ample use of legal counsel
  • Call centers or program offices staffed by people who are well-versed and enthusiastic about 529 plans
  • Successful efforts to gain a favorable determination from the IRS regarding status as a 529 plan
  • Well-designed web sites providing access to program materials

We don't like to see:

  • Program materials that are so sparse and leave so many questions unanswered that a lack of respect for Section 529 becomes apparent
  • Operational questions that do not appear to have been fully considered or disclosed but may be important issues under section 529 and the proposed regulations

Financial Aid Impact

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.

5-Cap Ratings - Terms of Use

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.

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