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COLLEGE SAVINGS 101

Q & A on 5-Cap Ratings
http://www.savingforcollege.com/articles/question-and-answer-on-5-cap-ratings

Posted 2013-07-17

by Joseph Hurley

Savingforcollege.com's 5-Cap Ratings of 529 plans have been one of our website's most visible, enduring and unique features. Millions of families and financial professionals have viewed the 5-Cap Ratings as part of their own research and comparison of 529 plans. Here we answer a few of the questions frequently asked about the 5-Cap Ratings.

What is a 5-Cap Rating?

A 5-Cap Rating is the rating assigned by Savingforcollege.com to a 529 plan based on the plan's strengths and weaknesses when compared to all other 529 plans. The highest rating is 5 caps, and the lowest is 0 caps. Half-caps are the smallest unit of measurement.

How do you determine a plan's 5-Cap Rating?

For each 529 plan we evaluate as many as 28 factors. These factors are all described in Chapter 6 of The Best Way to Save for College, by Joseph Hurley. The importance (in our minds) of each factor determines its weighting in our formula. A 529 plan receives a score for each factor. These ratings, and their respective weightings, are entered into an algorithm that determines the plan's overall 5-Cap Rating.

Why are there two 5-Cap Ratings for a plan: "Resident" and "Non-Resident"?

Since many states offer a state tax deduction or other special incentives to their residents for using their plan, the 5-Cap Rating may be different for residents than for non-residents who are not eligible for in-state benefits. You should pay attention to the Resident 5-Cap Rating for the 529 plan in your own state and to the Non-Resident 5-Cap Rating for all other states' plans. In other words, ignore the Resident 5-Cap Ratings for plans outside your own state.

When I look up a particular 529 plan on Savingforcollege.com, I see scores next to the 5-Cap Rating. What are they?

We have grouped all the factors into four categories: Performance, Costs, Features, and Reliability. These categories are described in more detail here. The score you see for each category is the precise figure derived from our review of the 529 plan and contributes 25% towards the final 5-Cap Rating (Non-Resident). In addition, a "Resident Upgrade" category reflects any special benefits for state residents, which determines the Resident 5-Cap Rating.

How often are the 5-Cap Ratings updated?

We review the 5-Cap Ratings every quarter, after the quarterly 529 performance rankings are posted.

If broker-sold 529 plans are more expensive than direct-sold 529 plans, why aren't their 5-Cap Ratings always lower?

The 5-Cap Ratings work on the presumption that a financial advisor selling the 529 plan provides services that are roughly equivalent in value to the extra costs of the plan. This may or may not be the case in any particular situation; that is up to you to determine. Certainly, different broker-sold plans will have different levels of sales charges and ongoing expenses, and those differences are picked up in our 5-Cap scoring.

Should I base my selection of 529 plan solely on the 5-Cap Ratings?

No. The 5-Cap Ratings are simply a tool designed to help you in your 529 decision process, much like a Consumer Reports score might help you in selecting a new car. Everyone's situation is different, and you might disagree with our scoring, or with our weighting of factors. The 5-Cap Ratings do not guarantee or predict the future performance or handling of your account. Before investing with a 529 plan, you should read and understand the plan's official program disclosure statement. See our full disclaimer here.

How long has Savingforcollege.com been publishing its 5-Cap Ratings?

The 5-Cap Ratings were first published in 1999. The formula that creates the ratings has changed considerably over the years.

Savingforcollege.com's 5-Cap Ratings of 529 plans have been one of our website's most visible, enduring and unique features. Millions of families and financial professionals have viewed the 5-Cap Ratings as part of their own research and comparison of 529 plans. Here we answer a few of the questions frequently asked about the 5-Cap Ratings.

What is a 5-Cap Rating?

A 5-Cap Rating is the rating assigned by Savingforcollege.com to a 529 plan based on the plan's strengths and weaknesses when compared to all other 529 plans. The highest rating is 5 caps, and the lowest is 0 caps. Half-caps are the smallest unit of measurement.

How do you determine a plan's 5-Cap Rating?

For each 529 plan we evaluate as many as 28 factors. These factors are all described in Chapter 6 of The Best Way to Save for College, by Joseph Hurley. The importance (in our minds) of each factor determines its weighting in our formula. A 529 plan receives a score for each factor. These ratings, and their respective weightings, are entered into an algorithm that determines the plan's overall 5-Cap Rating.

Why are there two 5-Cap Ratings for a plan: "Resident" and "Non-Resident"?

Since many states offer a state tax deduction or other special incentives to their residents for using their plan, the 5-Cap Rating may be different for residents than for non-residents who are not eligible for in-state benefits. You should pay attention to the Resident 5-Cap Rating for the 529 plan in your own state and to the Non-Resident 5-Cap Rating for all other states' plans. In other words, ignore the Resident 5-Cap Ratings for plans outside your own state.

When I look up a particular 529 plan on Savingforcollege.com, I see scores next to the 5-Cap Rating. What are they?

We have grouped all the factors into four categories: Performance, Costs, Features, and Reliability. These categories are described in more detail here. The score you see for each category is the precise figure derived from our review of the 529 plan and contributes 25% towards the final 5-Cap Rating (Non-Resident). In addition, a "Resident Upgrade" category reflects any special benefits for state residents, which determines the Resident 5-Cap Rating.

How often are the 5-Cap Ratings updated?

We review the 5-Cap Ratings every quarter, after the quarterly 529 performance rankings are posted.

If broker-sold 529 plans are more expensive than direct-sold 529 plans, why aren't their 5-Cap Ratings always lower?

The 5-Cap Ratings work on the presumption that a financial advisor selling the 529 plan provides services that are roughly equivalent in value to the extra costs of the plan. This may or may not be the case in any particular situation; that is up to you to determine. Certainly, different broker-sold plans will have different levels of sales charges and ongoing expenses, and those differences are picked up in our 5-Cap scoring.

Should I base my selection of 529 plan solely on the 5-Cap Ratings?

No. The 5-Cap Ratings are simply a tool designed to help you in your 529 decision process, much like a Consumer Reports score might help you in selecting a new car. Everyone's situation is different, and you might disagree with our scoring, or with our weighting of factors. The 5-Cap Ratings do not guarantee or predict the future performance or handling of your account. Before investing with a 529 plan, you should read and understand the plan's official program disclosure statement. See our full disclaimer here.

How long has Savingforcollege.com been publishing its 5-Cap Ratings?

The 5-Cap Ratings were first published in 1999. The formula that creates the ratings has changed considerably over the years.

 
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