IF YOU HAVE CHILDREN you have probably already heard of pre-paid college tuition plans. In 1996 Congress passed a law allowing assets in state-run college savings accounts to grow tax-free until a child reaches college. And there are further proposals that would make distributions to students tax-free as well. Nineteen states have plans already -- and 20 more are expected to be introduced by year's end. Why do states love the plans so much? Because they get cash upfront and take virtually no risk.

But you do take a risk. You give up the opportunity to make better returns in very liquid investments like stocks, bonds and funds. In return, most of the plans give you the satisfaction of knowing that Junior?s tuition bill is paid. Here?s a rundown of four types of pre-paid college plans, and an explanation of what?s wrong with them.

The Savings Plan
The least attractive of the four types. Kentucky?s savings plan, for example, guarantees a 4% minimum rate of return, but it doesn?t promise to cover the cost of future tuition. Over the past three years, the fund, which is invested in corporate and government bonds, has earned an average annual 6.2%, barely outpacing tuition inflation across the country. Unless the law changes, your child will pay income tax on distributions from the fund, which can be spent at any two-year or four-year college. If your child doesn?t go to college, you pay a small penalty of $25 or 2% of assets, whichever is less.

Think of this plan as a conservative bond fund with a guaranteed minimum rate of return. It would be a good deal if interest rates fell below 4%. But, how likely is that? Besides, you can guarantee yourself a higher yield than 4% with no interest rate risk by buying Treasury strips (zero-coupon bonds). Treasury strips are simply the interest-bearing coupons of 30-year Treasury bonds, which you buy at a discount to their face value, usually $1,000. You can buy strips from a discount broker, usually with a minimum of $5,000 and a commission of less than 1%.

Say your child is going to school 18 years from now; you can buy strips that mature in 2015 with a coupon of 6.46%. You get the appreciation at maturity and pay income tax on it. If your child is older, you can still buy strips which mature in, say, four years that pay 5.86%.

The Contract Plan
This is the most popular of the pre-paid tuition plans. You pay the price of today?s tuition to cover your child?s future matriculation at a public school in your state. You choose a contract that is worth, say, two years tuition at a community college. You can pay in a lump sum, or over time with interest. In Florida, which has the largest program in the country, participants pay 5% to 7.5% interest compounded annually.

Sounds like an okay deal at first. But the contract plan makes sense only if you are willing to wager two things will happen. One: Your child will want to go to a public college in your state. Two: That tuition there will rise faster than your own investment portfolio might.

Those are long-shot bets. Who can guess where a five-year-old might someday go to college? If your child decides to go to an out of state school, you may get back just a 5% annual return, or even less. But, over the past five and 10 years, returns on stocks and both long and intermediate term bonds have beat the rate of tuition inflation across the country. So, you are probably better off building your own investment portfolio and not limiting Junior?s college choices.

But, as your child gets older and you want to move your portfolio from equities into cash anyway, these plans start to make a little more sense. Once again, compare the return your state plan guarantees to the return on a Treasury strip. If the state pays more, and your kid is likely to go to state school, then it may be worth buying into the plan. These plans are taxed as income at the student's rate, and Treasury strips are taxed as income to whomever owns them. Unfortunately, most plans guarantee you less than even the 5.80% you can get on a three-year zero coupon Treasury bond.

The Unit Plan
Rather than buy a contract for a set number of years of tuition at a particular type of school, the unit plan allows participants to pre-pay any amount of college tuition.

Ohio's Prepaid Tuition Program is a good example. The state sells units worth 1% of the average tuition at Ohio?s 13 four-year public universities. This year, a unit costs just $40. The good thing about the Ohio plan is that you can spend your units at any college in the country. Your return will be whatever the rate of tuition inflation has been in Ohio. Moreover, the units can be transferred to any family member. Think of this investment as a AAA-rated zero-coupon bond that will return the rate of Ohio?s tuition inflation. Distributions will be taxed as income to the child.

If you have the money to pay for college today and don?t want to take any risks in the stock or bond markets, this plan will buy you peace of mind and your child an education.

The Massachusetts Plan
Here too, you pay today?s price to go to college tomorrow. But the program has a twist. Distributions are tax-free. How's that? You buy state general-obligation bonds. The bonds return the rate of inflation, plus the difference between the rate of inflation and the average annual tuition increase of participating colleges up to 2% over the inflation rate. If tuition rises faster than that, the schools in the Massachusetts College Savings Program eat the difference.

So far, 83 of the state?s 91 public and private colleges have joined the plan. Harvard and MIT are not in. Unlike other plans, this one is open to nonresidents of Massachusetts. If your child decides not to go to a college in the program, you get back your principal plus the consumer price index, tax-free. That?s no big bonus. You could earn a lot more investing in equities or bonds that are far more liquid. But, once again, if you have the money to pay for college today and don?t want to take any market risk, this program may be right for you.

If you want to find out more about a particular state program, the College Savings Plan Network provides links to most state plans.