Babies barely utter their first cry before parents begin contemplating ways to fund their offspring’s Ivy League education.

These days, one of the hottest college investments are Section 529 plans, named for a part of the tax code. Each state has its own 529 plan, and many states offer multiple programs. The popularity of 529s stems from a favorite phrase: tax breaks. Money in these programs grows tax-deferred and is exempt from federal taxes if put toward college expenses. Many states also offer tax benefits to residents investing in local 529s.

Parents also enjoy the fact that under 529 plans, they keep control of the money – even if the fund is in their child’s name.

“That’s the beauty,” said the president of Long Island’s AJK Financial Group, Alan Kahn. “It can only be used for schooling, and the parents, grandparents, and guardians control it. At 18, the child can’t go off and buy a Maserati and run off to Europe.”

Even families tight on cash can invest in a 529 plan. New York requires only $25 to open an account, or $15 if the parent plans on having the money automatically deducted from a paycheck. The rules vary from state to state, but in New York, 529 beneficiaries can have up to $235,000 placed in accounts under their name. Also, New York’s 529 investors can claim an individual income tax deduction of up to $5,000, or $10,000 for married couples filing jointly, so long as the check is postmarked on or before December 31.

When kids finally pack up and head off to college, the money pays for college necessities like tuition, fees, books, and supplies. Fees do not include fraternity dues.

Many states offer two different types of 529 programs: the savings plan and the prepaid tuition plan. New York only offers the savings plan.

“The savings plans work more like a retirement account,” said Joseph Hurley, 529 expert and CEO of Savingforcollege.com LLC. Each state hires a mutual fund company to help run the program and provide a range of different investment options, often spanning the gamut from conservative to aggressive. Through Vanguard Group, New York offers 15 investment choices – 12 individual portfolios and three aged-based options that grow more conservative as the child nears college age.

Generally speaking, investing in a 529 savings program won’t hurt a child’s chances of receiving federal financial aid, like Pell grants or Stafford loans. Because the account is in the name of the parent or grandparent, little of the money is held against the child.

However, private colleges, which often offer their own grants and scholarships, don’t play by the same rules. If they find out a child has a 529 account, the colleges will often hold it against a child’s need-based aid.

“That’s the free money, and that’s what really hurts, when you loose the free money,” said the co-founder of the National Institute of Certified College Planners, Rick Darvis.

Some states offer another 529 option called a prepaid tuition plan. Under these plans, the parents can pay for one semester’s worth of instate tuition, and 18 years later, that sum of money will still be worth one semester of school. In other words, the amount invested grows at the same rate as instate college tuition. If the child decides to attend an out-of-state school, the plan will typically pay the average cost of instate tuition. New York doesn’t offer such a plan.

A prepaid tuition plan does hurt a child’s chances of receiving financial aid, as any money in it is considered a resource of the child’s, not the parent’s. However, federal financial aid rules change frequently, and in the future, prepaid plans may receive the same treatment as savings plans.

Grandparents often relish contributing to 529 plans – not only because they can help send Junior off to school, but for estate-planning reasons, as contributions go towards the $11,000 gift-tax exclusion.

But financial professionals acknowledge problems with some state’s 529 plans, which include high maintenance fees, poor performance, and fines if the child doesn’t attend college. In New York, expect to be slapped with federal, state, and local income taxes, as well as an additional 10% fee, if the funds aren’t used for college.

As with many 529s, some leeway is built into New York’s plans. If one child finishes college without spending all the money, the funds can be transferred without fees to another child in the family. If a child passes away, the money can be withdrawn without penalty.

In all, Mr. Kahn believes 529s are the “best vehicle out there today to save for school. The earlier you start, the better off you are.”

When Choosing a Plan, Look Close to Home

Choosing a 529 can be daunting because every state offers at least one, making for 50 different sets of rules.

The fact that states aren’t required to disclose the same information as mutual funds – like a breakdown of fees – makes certain types of information difficult to come by. But one fact is certain: start by looking close to home.

“First pick out the plan that’s offered by your home state,” said an education analyst for independent research firm Morningstar, Dan McNeela. “There’re often certain benefits, like tax deductions on contributions.”

New Yorkers, for example, won’t get a state tax deduction if they invest in a plan outside the state.

Those seeking out a 529 plan should treat it like any other investment: Check for low fees, making sure costs don’t eat away at returns. The plans are managed by large mutual fund houses, like Vanguard and Putnam, so take the time to check out the firms’ reputations.

Be warned: Fees for 529 plans are higher than those of mutual funds because the state also plays a role in their management, creating another layer of salaried employees. Fees between various 529s can be difficult to compare, as different types of funds cost varying amounts of money to run.

Investors should look for a solid performance record, checking out the funds’ annual report. Also, make sure the state offers investment options, such as aggressive and conservative funds, catering to your risk tolerance.

The management of New York’s 529 program changed late last year, with Vanguard receiving a seven year contract after TIAACREF’s five-year deal drew to a close.

“Now we have 15 investment choices, compared with five or six,” said Ron Kermani, a spokesman for New York State’s Higher Education Services Corp, which helps run the plan.

The popularity of 529 plans is growing, due to a 2001 law making withdrawals tax-free at the federal level and because of rapidly rising tuition costs. New York’s program holds more than $2.9 billion in assets, up from $902 million in 2001, Mr. Kermani said. On a national level, the money held in 529s jumped to $54.35 billion from $13.58 in 2001, according to the College Savings Plan Network.

But much of the 529 expansion has come from people placing money in out-of-state funds, foregoing tax breaks often offered by home states. This activity has caught the attention of the regulatory agency, National Association of Securities Dealers, which issued an investor alert regarding the plans, urging investors to do their homework. The agency is also looking into sales made by a group of brokerage houses.

Earlier this year, a Securities and Exchange Commission task force set out to review 529 disclosure policies and varying fees.

Investors should bone up on the 529 basics before seeing a professional. In an effort to educate investors, the NASD has created an expense calculator to help figure out individual states’ fees. To access the calculator, visit www.nasd.com, and click on the “Investor Education” tab. The College Savings Plan Network’s site, www.collegesavings.org, contains a wealth of information on 529 plans, and at www.Savingforcollege.com, investors can compare various states’ plans. New York residents should refer to www.nysaves.com, the state’s official site for its 529 program.

Investors can also benefit from a report created by Morningstar’s Mr. McNeela, which rated the best and worst funds, taking into account costs, performance, flexibility of investment options, and the management company’s reputation.

Mr. McNeela favors all the 529s managed by Vanguard – which includes New York – as well as TIAA-CREF, American Funds, and T. Rowe Price. Because of high costs, he would avoid the Waddell & Reed InvestEd Plan in Arizona. Also scratched off the list are funds managed by Putnam, Strong, and Fred Alger Management, all companies that have been associated with unethical trading practices.