This fall, the independent investor research firm Morningstar released the names of its top-rated state-based college savings plans, and once again, Maryland’s 529 plans failed to make the cut. That’s not to suggest the Free State’s college savings accounts are not well regarded — they’ve been rated as second-tier or “silver” by Morningstar since 2016 (after being downgraded from “gold” status), which still puts them ahead of most states. But they aren’t up there with the likes of Illinois, Nevada, Virginia and Utah.
Given the rising cost of college tuition and the growing burden of student debt — pegged at $1.52 trillion in the first quarter of 2018 — the question remains: Is having a good college savings program good enough?
Granted, 529 plans aren’t really designed for those who can least afford college tuition — that’s what grants, need-based scholarships and other forms of direct aid are for. The 529 plans are designed for people, usually middle income or above, who can afford to stash away money each year for a child’s education. For those who have the money (or have grandparents or other relatives who can contribute), they can be a big boost. Some contributions are tax deductible, but all savings in a 529 grow tax-free, usually in stock and bond investments, not unlike a typical 401(k) or IRA retirement accounts. The effect can be dramatic, allowing families to save substantially more than they would through a regular savings account or even a standard brokerage account. That’s one reason why there’s an estimated $300 billion currently invested in 529 plans across the United States. Maryland’s plans control assets of $5.9 billion as of Sept. 30 with the average account containing $21,084.
But what happens if the fees are a little high or the funds don’t perform especially well or there isn’t much choice offered in a particular state’s program? The returns aren’t quite as good. And while families can always invest in out-of-state plans if they believe they offer a better return, in Maryland, at least, residents can’t get the state tax deduction for contributions. Under state law, that’s a perk limited to the Maryland plans handled by Maryland-based T. Rowe Price. That gives Maryland 529 (formerly known as the College Savings Plans of Maryland) a huge advantage. Some might say an anti-competitive advantage.
So why not even the playing field and let Maryland 529 compete against its peers? Nearly 17 years ago, the Maryland General Assembly passed legislation to do just that and it was vetoed by then-Gov. Parris N. Glendening. Why? His reasoning was that a profitable state-based 529 was essential because it meant some of those profits could be used toward advertising college savings plans to parents. Meanwhile, the governor observed, extending the $2,500 annual state tax credit on contributions to out-of-state plans would cause Marylanders to redirect their savings to those plans, the profits from which would subsidize those other states that use them to finance in-state scholarships and other higher ed costs.
But those objections don’t hold up. First, the Maryland plans (created just one year earlier in 2001) are now well established and are unlikely to suffer much by competition. Profits on the billions of dollars invested still pay for a lot of family outreach. Second, at least seven states now extend their local tax benefits to all states — Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania. Even in 2002, Governor Glendening described his veto as a “difficult decision” and wrote that he supported the legislature’s policy of giving families “the flexibility to choose the best investment vehicle for their needs.”
Let’s make it clear. The Maryland 529 plans are still well-regarded, and the difference between them and Morningstar’s top-ranked 529 plans is relatively small. Yet in the interests of giving families that flexibility Governor Glendening wrote about, removing the unfair advantage the Maryland 529 plans were given by state law (or more precisely, extending that tax advantage to competitors), appears sensible and in the best interests of maximizing college savings for Maryland families. Not every college or university has a donor like Michael Bloomberg who recently announced a $1.8 billion gift to Johns Hopkins for scholarships. In the real world and unless they are truly wealthy, parents of college-bound students need every dime they can find.