College Savings

Best 529 College Savings Plans, 2018 Edition

Every year, Morningstar rates the country's best and worst 529 college savings plans. The ratings are based primarily on the same five key pillars that Morningstar uses to rank all investments: Process, People, Parent, Price, and Performance. Basically, Morningstar looks for plans with low fees, good investments, a decent selection of investment options, an asset allocation approach based on the most up-to-date research and solid management by the state and program manager.

In addition to the five categories listed above, the ratings also take into consideration any state tax breaks provided by the plans. This is important when deciding which plan to invest in because while every state has a 529 plan, not every plan provides a deduction for contributions to the plan.

In all, Morningstar rated 62 plans. Unfortunately, the DC College Savings Plan was not included in the ratings. This isn't unusual; Morningstar hasn't rated the DC plan in previous years. I've contacted Morningstar numerous times to request the inclusion of the DC plan, but I haven't had any success.

Without further ado, here are the best and worst plans for 2018 along with some commentary on the plans relevant to residents of DC, MD, and VA.

The Best

  1. Bright Start College Savings (Illinois).

  2. Invest529 (Virginia)This plan features age-based portfolios, passively managed portfolios (index funds), and actively managed portfolios (investments selected by a human). Residents of Virginia can deduct their contributions up to $4,000 per account, per year, with unlimited carryover to future tax years.

  3. Vanguard 529 College Savings (Nevada).

  4. My 529/Utah Educational Savings Plan (Utah).

Honorable Mentions

  1. CollegeAmerica (Virginia)Unlike the Invest529 plan mentioned above, this Virginia 529 savings plan is only available through investment advisors. It's managed by American Funds, which means the only investment options are actively-managed funds. Residents of Virginia can deduct their contributions up to $4,000 per account, per year, with unlimited carryover to future tax years.

  2. Maryland College Investment (Maryland)This plan is managed by Baltimore-based investment company T. Rowe Price. It features enrolment-based portfolios and fixed portfolios. Residents of Maryland can deduct contributions up to $2,500 per year per beneficiary (child) from their state income taxes.

The Worst

  1. College SAVE (North Dakota).

  2. Florida 529 Savings Plan (Florida).

  3. Franklin Templeton 529 College Savings Plan (New Jersey).

  4. GIFT College Investing Plan (Arkansas).

  5. TD Ameritrade 529 College Savings (Nebraska).

What About DC's 529 Plan?

In case you missed it, a couple of years ago I exchanged several emails with the department tasked with overseeing the DC plan. As a frugal financial planner, resident of DC, and saver in the DC plan, I was unhappy with then-manager Calvert Investments. The investment options were lousy and the fees were outrageous.

The DC College Savings Plan, now managed by Ascensus, is a huge improvement over the plan as managed by Calvert. I feel much better about recommending the DC plan to clients and friends.

Savers can choose from individual portfolios or year-of-college enrollment portfolios. In both cases, the underlying investments are mutual funds and ETFs from Vanguard, iShares, and Schwab.

Residents of DC can deduct up to $8,000 for married couples filing jointly, who have separate accounts, ($4,000 for individuals) when they contribute to their DC College Savings Plan account.

Which Plan Is Best For Me?

The answer to this question, like many other questions in personal finance, is: It depends.

If you live in a state that has a decent plan and where you'll receive a tax deduction, then, by all means, use that plan. If, on the other hand, your home state's plan is lousy, perhaps because of high fees or poor investment options, then you should opt for a plan in another state.

The Ins and Outs of the DC Tuition Assistance Grant (DCTAG)

Fact: No one seems to know exactly when people started giving apples to teachers, but it may have started long ago when food was used to pay teachers for their services.  Another Fact: I don't know any teachers who want to be paid with apples (or food in general).

Fact: No one seems to know exactly when people started giving apples to teachers, but it may have started long ago when food was used to pay teachers for their services.

Another Fact: I don't know any teachers who want to be paid with apples (or food in general).

What Options Do College-Bound Residents of DC Have When Applying to Out-of-State Schools?

Unless you're a resident of Washington, DC, this week's post may be of limited interest to you, but feel free to share if you know someone that can benefit from the information!

I'm often asked if residents of DC can receive in-state tuition when attending an out-of-state school. While the actual benefit may not equate to in-state prices, it's still worth it. Here are the details.

The DC Tuition Assistance Grant (DCTAG)

  • What is it? The DCTAG was created by Congress in 1999 for the purpose of expanding higher education choices for college-bound residents of DC.
  • What schools are eligible? The DCTAG treats public and private schools differently:
    • Public: DC residents may use the DCTAG to attend one of the more than 2,500 colleges and universities in the nation.
    • Private: DC residents may use the DCTAG to attend any private HIstorically Black College or University (HBCU) or private not-for-profit college or university in the DC metro area.
  • What is the benefit? Again, the DCTAG has slightly different benefits based on the type of school:
    • Public: Up to $10,000 per academic year (a maximum of $5,000 per semester) toward the difference between in-state and out-of-state tuition, for a lifetime maximum of $50,000. The award is disbursed directly to the institution.
    • Private: Up to $2,500 per academic year (a maximum of $1,250 per semester), for a lifetime maximum of $12,500. The award is disbursed directly to the institution.
  • What are the eligibility requirements? Students must be enrolled on at least a half-time basis and be in good academic standing. Awards do not cover mini-terms or non-accredited online classes.
  • How do I apply for the DCTAG? There are three requirements:
  • Is funding for the DCTAG in danger? Between late 2017 and early 2018, the Senate and the Trump Administration attempted to cut funding for the program. Congresswoman Eleanor Holmes Norton (D-DC) negotiated to maintain $40 million for DCTAG. For now, the program will remain in place.
  • Where can I learn more? Check out the Office of the State Superintendent of Education.

Listening / Reading / Watching

Here's what has my attention right now:

  • The Outsider by Stephen King. To say I'm a longtime fan of King's work is an understatement. This week marks the release of his new book and I can't wait to dive in.

My Takeaways From the 2017 XY Planning Network Conference

What I Learned

  1. The number of advisors working with Gen X and Gen Y clients continues to grow - quickly. The XY Planning Network had 250 members in 2016. Not bad, but the network was just shy of 500 members when the conference started. That's a lot of advisors dedicated to serving as fiduciaries for their clients. Especially when you consider parts of the financial services industry are fighting hard to kill or water down the Department of Labor's Fiduciary Rule. Advisors in the XYPN have embraced working in their clients' best interests.
  2. FinTech (financial technology) for advisors continues to improve. There were some impressive new tools designed to help advisors better serve their clients. I wish I could adopt everything showcased at the conference. Too bad I have a finite budget for tech!
  3. I'm adding a new college planning/pre-approval service to my practice. While at the conference, I took a day long workshop on college planning and learned ways to help clients and their children make better-informed decisions and, hopefully, save money, when it's time to select a school.
  4. It's worth taking time off to go to a conference. The value of continuing education and time spent talking to my fellow planners far outweighs the costs associated with attending a conference.
  5. I need to pack a hoodie for next year's conference. The main ballroom in the hotel was freezing.

Listening / Reading / Watching

Here's what has my attention right now:

  • Where You Go Is Not Who You Will Be: An Antidote to the College Admissions Mania, by Frank Bruni. This book was recommended by one of the presenters at the XYPN conference. "Bruni, a best-selling author and a columnist for the New York Times, shows that the Ivy League has no monopoly on corner offices, governors' mansions, or the most prestigious academic and scientific grants. Through statistics, surveys, and the stories of hugely successful people who didn't attend the most exclusive schools, he demonstrates that many kinds of colleges - large public universities, tiny hideaways in the hinterlands - serve as ideal springboards."
  • The Clockwork Dynasty, by Daniel H. Wilson. Here's another fun book from the author of Robopocalypse and Robogenesis. Instead of having robots take over the world, Wilson "weaves a path through history, following a race of human-like machines that have been hiding among us for untold centuries."

Review of the Overhauled D.C. College Savings Plan

Finally, a Much-Needed Overhaul of D.C.'s College Savings Plan

Last month, I rejoiced after receiving a brochure in the mail touting "new enhancements" to the D.C. College Savings Plan (529 Plan). My wife seemed to think I was the only resident of D.C. excited by this news. Who wouldn't be excited??

Some background: For the last couple years, I've been on a mission to get a new program manager for the D.C. 529 Plan. The old program manager, Calvert Investments, provided expensive and mediocre investment options, which made D.C.'s offering difficult to recommend over superior plans from other states.

During my quest to change the plan's program manager, I exchanged several emails with Jeffrey Barnette, the D.C. Treasurer and Deputy CFO, and John Henry, D.C. Associate Treasurer. They told me:

  1. Due to the small population of D.C., Calvert Investments was the only company interested in managing D.C.'s plan.
  2. Because Calvert was managing the plan, D.C. residents would have access to socially responsible actively managed mutual funds "which naturally come with higher expense ratios than funds that are not actively managed, such as passively managed index funds".
  3. Due to demand from participants, D.C. added a passively managed fund, the State Street Equity 500 Index fund. Oh, and by the way, it just happens to have an expense ratio of 0.50%. Not good. For comparison purposes, the Vanguard 500 Index has an expense ratio of 0.04%. That's a difference of 0.46%! While expenses aren't the only factor to consider when choosing an investment, they are extremely important. Here's what you need to remember: High expenses bad, low expenses good.
  4. D.C. recently issued a Request for Proposal (RFP) for a new service provider. Naturally, this news made me happy.

Even NBC's News 4 I-Team, which surprisingly is not at all like The A-Team, ran a story questioning the costs associated with the Calvert-managed D.C. plan.

I was able to get a copy of the RFP and review it for myself. After that, I heard nothing from D.C. until I received the brochure in the mail. And the news was good: Calvert would be replaced by Ascensus as the program manager and, more importantly, participants would have access to investments from Vanguard, Dimensional Fund Advisors, and iShares.

Here's a breakdown of The Good and The Bad of the new plan.

The Good

  1. Easier online enrollment: The process of opening an account online has been streamlined and should take just a few minutes.
  2. A lower initial contribution: Under the old plan, the minimum initial contribution was $100. The new minimum is $25.
  3. Better investment options: Like the old plan, the new plan offers both individual investments and age-based portfolios (now called Year of College Enrollment Portfolios). The big difference between the plans is the investment options. Participants now have access to low-cost mutual funds and Exchange Traded Funds (ETFs) from Vanguard, Dimensional Fund Advisors, iShares, Schwab, and JP Morgan.
  4. Less expensive investments: Under the old plan managed by Calvert, investment expenses were as high as 1.66%. There's no excuse for that. Under the new plan, investment expenses are far more reasonable, ranging from 0.15% to 0.80%.

The Bad

  1. Actual investment options are difficult to find: As a financial nerd, I want to know what exactly I'm investing my hard-earned money in. The problem is that I really had to dig into the site to find out what the underlying investments were. For example, the U.S. Total Stock Market Index Portfolio is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker symbol ITOT).
  2. Individual investments feature inflated expenses: I looked at each of the individual investments and found they were inflated by 0.30% - to 0.44%. For example, the U.S. Total Stock Market Index Portfolio, which is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker ITOT), currently has expenses of 0.03%. However, the D.C. plan charges 0.33%. Why the difference? I don't know, but I'm going to find out.

The Verdict

The D.C. College Savings Plan, now managed by Ascensus, is a huge improvement over the plan as managed by Calvert Investments. I feel much better about recommending the D.C. plan to clients and friends.

Maybe now I can get Morningstar to include the D.C. plan in their annual rankings of best (and worst) 529 plans. For the past four years, I've asked Morningstar to include the plan and every year the answer is the same: "the D.C. plan is too small to include in our rankings". 

Listening / Reading / Watching

Here's what has my attention right now:

  • The backlog of Wired magazine issues sitting on my nightstand: It's time I read through these so I can make room for more books and periodicals.
  • I need some recommendations for TV: Now that Legion and The Walking Dead have wrapped up their seasons, I'm searching for new sources of entertainment.