Also, individuals could select their own LSA investments, as with a self-directed IRA. Investors in 529 plans are not permitted to control investment decisions; plan managers make them. Balances in ESAs and 529 plans could be rolled over into LSAs, subject to some limitations. Also, states could offer LSAs as well as 529 plans and other qualified tuition programs.

"I think the LSA would be seen as a more attractive option for a lot of investors than a 529, so I think it would divert the first $5,000 of annual savings for a lot of them. If a state offers a tax deduction for a 529, that might be enough to keep the money going into them," says Joe Hurley, CEO of savingforcollege.com, whose Web site on college saving includes an extensive database of 529 plans.

"LSAs will threaten the existence of 529 plans, no doubt about it," says Ron Then, a founder of the National Institute of Certified College Planners and owner of Educational Benefits Group, a Dublin, Ohio-based firm that trains financial advisors and CPAs in college planning. With LSAs, a couple with one child could save as much as $15,000 a year for education expenses by putting $5,000 each into their own accounts and $5,000 into an LSA in the child's name, he notes, and such a strategy would be a lot more flexible than other savings options. Most people save far less than that per year for college expenses, he continues.

The average account balance in 529 plans at the end of 2003 was $7,820, reports Financial Research Corp. of Boston. But interest in the accounts has grown significantly in the last few years, FRC says, with total assets increasing 83% to $35.2 billion at the end of last year compared with the end of 2002.

Hurley and others believe that people who are able to save more than $5,000 a year for their child's education would still find 529 plans very attractive. Some plans allow more than $230,000 per beneficiary to be accumulated, and donors can contribute $11,000 a year per beneficiary that's not subject to gift taxes. In fact, donors can contribute up to five times the annual exclusion-as much as $55,000-to a 529 account but can treat it, for gift and generation-skipping taxes purposes, as being made over five years.

"There's really no reason why LSAs and 529s can't live side by side," says Elaine M. Sullivan, senior vice president and director of educational saving for Putnam Investments in Boston. "Part of that thought process is if a person had money to save to send their kids to college, [a 529 plan] is definitely the better product. If a person had money to set aside for anything other than college, he or she could use an LSA." Her firm manages the Putnam College Advantage Program for the state of Ohio. The plan is sold nationally through financial advisors.

Others agree LSAs wouldn't be the best choice for college savings for many people because they offer too much flexibility. Whitney Dow, FRC's director of education savings research, says LSAs would be too undisciplined to have a meaningful affect on increasing college savings. Because people could withdraw the funds for any reason without penalty, many might not accumulate as much money for long-term goals such as their children's college costs because they'd use the funds sooner for other expenses.

Koprowski of Delessert Financial Services agrees that could be a danger, but having a financial advisor could also help people make the best choices for college savings and avoid that pitfall. Several of Bush's proposals are designed to prevent "the unintended and inappropriate use of Section 529 plans," which includes using them as retirement accounts or to avoid gift and generation-skipping taxes. Among those proposals:

A new excise tax of 35% on the first $100,000 of cumulative nonqualified distributions over $50,000 and 50% on such distributions over $150,000. Right now, a 10% penalty applies to all nonqualified withdrawals.

Only an individual under age 35 could be the designated beneficiary of an account. When the beneficiary reached 35, the account would have to be distributed to that person or a new beneficiary would have to be named.