Picking the best, worst college savings plans

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Morningstar recently released its annual list of the five best and five worst 529 college savings plans. Past favorites Utah Educational Savings and Nebraska College Savings dropped out of the top five, not because they got worse, but because other plans got better.Named after a section of the Internal Revenue Code, 529 plans are state-sponsored programs that provide federal tax benefits for college savings. You can set them up for your kids, grandkids, other loved ones or yourself. There are no income limits, and most plans let you contribute large six-figure sums. You get no federal tax deduction for money you put into the plan, but the money grows tax-free and remains tax-free when you take it out, as long as it's used for qualified higher education expenses at almost any public or private college in the country. States also exempt earnings and qualified withdrawals from state income taxes. No matter where you live, you can invest in any state's plan. Some states offer a state tax deduction for contributions or other perks when their own residents invest in the home-state plan. Most states hire investment firms to run their programs. Many states offer two plans: one sold by brokers (who usually charge a sales commission) and one that is sold directly to investors without a middleman or sales fee.Most offer a variety of investment options, such as money market, bond and stock funds as well as age-based funds that gradually become more conservative as a child gets older.Morningstar's top-rated plans this year are direct-sold plans from Illinois, Maryland and Virginia and broker-sold plans from Virginia and Colorado.Morningstar likes plans that provide a wide variety of asset classes for diversification, low costs, solid underlying funds and the flexibility to easily make changes.Costs are a particular concern, because they come directly out of returns.In many plans, "there are layer upon layer of fees," Morningstar analyst Marta Norton says. In addition to the underlying fund fees, many charge program or account-maintenance fees, plus -- in the case of broker-sold funds -- sales commissions.The Illinois Bright Start plan joined the top five list this year after it switched managers and cut fees. Also new to the best list is the Virginia Education Savings Trust, a direct-sold fund that offers a wide array of options (including real estate, international and inflation-protected funds) at a very low cost (asset-based fees range from 0.31 to 0.57 percent per year).These funds replaced Utah's and Nebraska's direct-sold plans on the list. "Both of those are still very good plans," Norton says. "They haven't raised their price. In fact, Utah lowered the annual maintenance fee for nonresidents." It's just that "in both cases, there was a cheaper competitor that undercut them," she said.Norton named the Virginia direct-sold plan as her top choice for hands-on investors who like to manage their college savings. For hands-off investors, she likes the Illinois plan because its index-fund option is "very cheap" and "does everything for you."Morningstar's worst list includes direct-sold plans from Mississippi and New York and broker-sold plans from Ohio, Mississippi and Nebraska.The Nebraska AIM plan is the only holdover from last year's bottom-five list and stands in stark contrast to Nebraska's highly rated direct-sold plan. Although the AIM plan has made some changes, its asset-based fees are still high, ranging up to 1.61 percent.These are Morningstar's five best and five worst 529 plans for 2008. Unless noted as broker sold, plans are sold directly to investors without a sales commission.Best Name Manager Illinois Bright Start College Savings Program Oppenheimer Funds Maryland College Inv. Plan T. Rowe Price Virginia CollegeAmerica* Virginia (American Funds) Virginia Education Savings Trust Virginia Colorado Scholars Choice College Savings Program* Legg Mason *Broker soldWorst Name Manager Ohio Putnam CollegeAdvantage* Putnam Mississippi Affordable College Savings Program TIAA-CREF Mississippi Affordable College Savings Program* TIAA-CREF New York 529 College Savings Program Upromise Nebraska AIM College Savings Plan* Union Bank (AIM) *Broker soldSource: Morningstar(Distributed by Scripps Howard News Service, www.scrippsnews.com.)