Since January 1, 2002 College Savings Plans have become more attractive to adults who want to save for their children's (or relatives’) education. As we mentioned earlier, the biggest change in these plans is that there are no Federal taxes due on the gains earned in them as long as the money is used for certain educational expenses. But there are a few catches to these plans that investors should be aware of:

States Run Their Own Plans. Because the states run their own plans, they can set their own rules about the withdrawal of the money, they can change where they invest your money, they can change the fees they charge associated with participation in the plan, they can determine whether contributions to the plan are deductible from state taxes, or any other conditions that they wish to impose on the accounts. Each plan has its own participation terms and these terms can vary considerably from state to state.

Fees. Some plans are expensive because they charge you a sales fee, a yearly maintenance fee and a fee that goes to the investment managers (such as TIAA-CREF). For this reason, we strongly recommend that before selecting a particular plan, you make sure you know the fees that are associated with the plan. Watch out for sales load and annual expense ratios.

Investment Choices are Limited. In the plans with guaranteed returns, you can’t decide exactly how your money will be invested. In the age-based plans, you have slightly more flexibility in investment choices but you are still bound by pre-established investment guidelines.

Some Plans Have Terrible Track Records. Unfortunately, the track record of some College Savings Plans is terrible. True, many of these plans have been around for only four or five years so they haven't had a chance to recover from market downturns that caused the S&P 500 Index to yield returns of -23.4% in 2002 and -13.0% in 2001. The overall market downturns, however, don't make the poor returns easy to swallow.

You Can’t Move Your Money Around As Often As You Might Like. You can only move your money to a different plan once a year. So if you happen to invest in a dog of a plan, you are stuck for a whole year even while the value of your college savings are going down.

State Tax Exemption Not Assured. If you are investing in an out-of-state plan, you may not be exempt from state taxes (which some states offer on the earnings of the plan). Get all the facts before you invest in another state's College Savings Plan. Find out what disadvantage you may have as an out-of-state investor.

Possible Expiration Of Tax Benefits. The current Federal tax benefits associated with College Savings Plans – especially the benefit that cancelled Federal taxes on earnings on these plans – will expire unless reaffirmed by Congress in 2010. In other words, if the tax benefits are not reaffirmed, taxes will be due on the earnings when money is pulled out of the account to meet educational expenses.