An extraordinary thing happened when the new tax law went into effect. Congress passed full federal income tax exemption for 529 plans. This means that, beginning in 2002, your beneficiary will no longer have to report income when withdrawals are used for qualifying college costs.

Should this affect your college investment decisions? You bet. You can now resist the lure of low capital gains rates on UTMA accounts. And banish the idea of using your Roth IRA for college expenses. U.S. savings bonds? Just not as good. Even the Education IRA, with its annual contribution cap raised from $500 to $2,000 and improved in other ways under the same tax bill, pales in comparison to the power of the 529 plan.

Think about it. You are able to contribute $50, $5,000, $50,000, or even $250,000 to a 529 plan for each of your kids or grandkids, no matter where you live and without regard to your income level. The account might triple in value (we should all be so lucky), and you will still be able to take withdrawals free of income tax as long as those withdrawals are used for your beneficiary's college and graduate school expenses.

Even the gift tax consequences of large contributions to a 529 plan will become less of an issue. The tax bill boosts the lifetime exemption amount from $675,000 currently to $1 million in 2002. (This is above and beyond the $10,000 annual gift exclusion.)

And I shouldn't neglect to mention another significant change to 529 plans made by the new bill. You will be allowed to roll over your account tax-free and penalty-free to a different state 529 plan as often as once every 12 months. You will not be required to change the beneficiary on the account, as current law demands. The reason this is important is because it gives you the opportunity to change your investment if you like, despite the continuing rule under section 529 prohibiting investment direction. I never liked the investment direction prohibition, and now Congress gives us an easy way around it.

What better incentives could there be to save for college? Why would anyone with the financial resources not want to start using college savings plans and prepaid tuition plans instead of pinning their hopes on a federal financial aid system that is bound to disappoint. (Financial aid should continue to assist those who really need the help.)

If I sound like I am unabashedly promoting 529 plans, please forgive me. I will be the first to point out that there are still many considerations in planning for future college expenses, and everyone's situation is unique. Other types of investments - mutual funds, Education IRA, savings bonds, variable universal life - can still be a good way to go for at least part of your college savings fund. And certainly you should continue to pay attention to your retirement needs with the 401(k), Roth IRA and other appropriate vehicles.

But at least now we have less reason to worry that income taxes will reduce the amount we have available in the future to pay for ever-increasing college costs. We will better afford the higher education that is so vital for our children, our grandchildren, or even ourselves.

Is the new law all good news? Not quite. To comply with certain budgetary laws, the changes made will "sunset" in 2010 unless Congress later decides to extend them. That makes us a little nervous. Also, the new rules will serve to make your planning more complex and your tax returns more complicated. In fact, some of this will really make your head spin.

For parents struggling to save for their children's college bills, tax breaks have been few and frustrating. Education IRAs? All you can put away is a paltry $500 a year -- and that's only if you don't bump up against strict income limits. Custodial accounts? The tax savings are minimal, and you give up control of the assets to your kid. State-run prepaid tuition plans? They lock you into subpar returns. Little wonder that most parents end up saving in taxable accounts -- thereby sacrificing a big piece of their profits to Uncle Sam -- or raiding their retirement accounts.

Enter the 529. These state college savings plans, named after the section of the tax code that governs them, are the more attractive siblings of prepaid tuition programs. Anyone, regardless of income, can open an account and invest a hefty amount in stock and bond funds (more than $150,000 in many states). Most plans let you in with as little as $25 a month. The money can be used at any school in the country, and you keep control until the child goes to college. Best of all, the money grows tax-free until it's withdrawn, when earnings are taxed at the student's rate, usually 15 percent. (There are proposals in Congress to make 529s completely tax-free.) To top it off, many states offer additional tax breaks of their own.

Given the generous tax advantages -- plus the opportunity to shelter enough cash to actually make a dent in those six-figure tuition bills -- 529s are on their way to becoming the collegiate version of the 401(k). As of early 2001, some 35 states were operating 529 savings plans; 29 of them available to residents of any state. Six more states will launch 529s by year-end, and another two states have authorized programs this year. More good news: States are increasingly turning over the operation of their 529s to established money-management firms. TIAA-CREF, with 12 state plans, dominates the field, but others are grabbing a piece of the action -- among them Alliance, Putnam and Fidelity -- using the states as launching pads to market plans nationwide.