Some 529 plans have also seen their participants saving less. The Utah Educational Savings Plan, for example, recently looked at account trends from November 2008 to May 2009 and compared them with the same seven-month period the year before. That program found that the average account holder donated only $562 during the most recent period, after putting in $966 a year earlier.

The rate of new accounts in Utah's 529 program-one of the top rated in the nation-was down 44%, according to program director Lynne Ward. But even though average contributions were down, the plan found that there was no letup in the number of monthly contributions account holders were making. Ward noted that the program, which has no minimum deposit requirements, has families that are making contributions of as little as $10 per month. "People aren't saving as much, but they are still saving," Ward says. The program added FDIC-insured accounts to its options in February.

Studies by the College Savings Foundation indicate that 529 account holders were, like most equity investors, shaken by the market events of late last year and are now gradually moving back into the market. This is reflected in the percentage of 529 account holders participating in automatic savings accounts, says foundation Chairman Kevin McMullen: The percentage of automatic contributions dropped from 39% to 31% in the fourth quarter of 2008, but rose to 38% in the first quarter, he says.
"We are at least encouraged that families think saving for a college education is important," McMullen says. "The increase in the automatic savings plans is a very positive sign."

Some advisors, however, think the market collapse exposed some deep-rooted problems in the 529 plan industry and that systemic changes are needed. "We have kind of soured on 529 plans over the last few years," says Owen Malcolm, senior vice president and chief operating officer of Sanders Financial Management in Norcross, Ga. "Frankly, I'd say there has been very, very little interest in 529 plans from any of our clients."

The lack of interest is mainly due to performance, he says. "It's hard to preach the tax benefits of 529 plans when most folks haven't had gains."

Adding to the problem, Malcolm says, is that 529 plans continue to be a "mysterious" product for most investors, with wide variations in options, fees and flexibility from state to state.

The other problem, he says, is the lack of control 529 plans give to account holders. Until recently, participants were allowed to change asset allocations only once a year. That was recently changed to twice a year-a change that would be made permanent under proposed legislation in Congress.

Malcolm says many of his clients have moved money into the low-risk options now being touted by the 529 industry. But as college costs rise at a rate of 7% or more per year, he sees little benefit in throwing assets into a plan that offers a return of less than 2%. He calls these new options "lipstick on a pig."

The low return is one of the reasons that Hartford Insurance, the program manager for West Virginia's 529 plan, has not vigorously rolled out its own FDIC-insured options, says Jeff Coghan, Hartford's assistant vice president of college savings programs.

"Demand for conservative products is high on the one hand," he says. "On the other hand, we know that college costs have inflated at a rate of 6% a year or even more the last 25 to 30 years, and it's not going to get any better."