As the name implies, a prepaid-tuition plan allows you to pay now to cover tuition costs further down the line. With tuition prices soaring, it's easy to see the appeal.

Prepaid-tuition plans come in two forms. Until recently, prepaid plans were only offered by specific states and the plans centered around the public universities in that state. In the fall of 2003, however, a private-school prepaid-tuition plan was introduced. This plan, known as the Independent 529 Plan, allows families in any state to pay today's tuition prices for future tuition bills at more than 270 participating private colleges.

Both types of prepaid plans come with some major drawbacks. First off, these plans obviously substantially restrict school selection. Granted, refunds are available, but if your child is attending a school not covered by the plan, there are no guarantees that the amount you have set aside in your prepaid plan will cover the school's costs. In many cases, it won't even come close.

Since July 2006, prepaid plans are treated as assets of the contributor, at least when it comes to federal financial aid. If the parents set up the account, this means that a financial-aid officer could count up to 5.6% of the account balance when assessing your child's financial-aid eligibility.

Next: Grade Your 529 Plan