Prepaid plans show signs of trouble.

• Position: Tuition

It was beginning to look too good for families saving for college, and maybe it was. After the bear market battered accounts invested in the popular tax-favored 529 college savings plans, which operate much like a mutual fund, families began taking a second look at the 529 plan's older cousin, the prepaid tuition plan, offered by 20 states. In this type, the family buys "tomorrow's tuition at today's prices" by purchasing "units" or a contract with their state that generally guarantees that the plan will cover future tuition costs, and often fees, for the child at a state school, regardless of how much tuition rises between now and the student's enrollment. The fee a family pays is generally based on the state's average tuition costs, the child's grade level, and the number of school years the family wants to pay for. Payments are made monthly or in a lump sum. Earnings are tax-free.

Considering that tuition for four-year public universities jumped an average of 9.6% for the 2002-03 school year, according to the College Board, and with schools seeing double-digit increases, the "safe" return on prepaid plans was looking pretty good in such a dismal investment market. However, the portfolios needed to fund these plans' obligations are no more immune to the bear market than anyone else. If the portfolios' average returns less than the average tuition increases, they can't meet their obligations as planned. Several state plans are projecting long-term shortfalls unless the markets heal quickly and tuition increases slow down. Current participants won't likely lose their principal, which they can with a 529 plan or some other forms of investments, but they may have to pay more than originally anticipated, such as through tacked-on annual fees, or they may decide to leave the programs.

What exactly will happen is varying from state to state. Colorado's prepaid tuition program stopped taking...