Are you in the right college savings plan?

Just a couple of years ago putting away enough money to pay your kids's college bills seemed, well, not easy but possible. You were plowing money into your 529 college savings plan, and it was growing steadily. Next stop, Ivy League—or at least a flagship public college.

We all know what happened next. Your 529 plunged in the market meltdown, just like your 401(k). And now you are trying to minimize the damage to your portfolio, perhaps by shifting into bonds or cash. The 529 plan providers are scrambling too.  After huge losses in the Oregon College Savings Plan bond fund, the state treasurer filed a lawsuit against OppenheimerFunds accusing the group of negligence. Meanwhile, other state 529 plans, including Utah, Wisconsin and Arizona, have added new investment options that focus on safety, such as federally insured CDs and bank accounts.

Even the pros have adopted a safety-first mindset. Morningstar's latest annual list of best and worst 529 plans, which was released yesterday, dropped several of last year's plans in part because of their poor performance in market crash.  Among them: Illinois's Bright Start College Savings Program, which included the disastrous Oppenheimer bond fund in its menu. (For the record, Bright Start also offers low-cost age-based portfolios made up of Vanguard  index funds.)  The plans that did get a thumbs up, such as Ohio CollegeAdvantage and Indiana CollegeChoice, provide low-risk age-based portfolios and conservative options, among other criteria.

But is a flight to safety the right move to make now?  Yes, it's important to reduce risk as that first tuition bill nears.  Still, for parents of younger children, investing in stocks remains the only way to earn returns that will stay ahead of  inflation—and especially college price inflation. Tuition prices hikes have outpaced the Consumer Price Index by an average four percentage points over the past decade. (To see how much you might end up paying for college, you can try this calculator.) So if you stash all your savings in CDs or money market funds, which lag inflation by a wide margin, you are virtually guaranteed to fall short—unless you can stash away prodigious amounts.

The key is to select an age-based fund that is really suited to your risk tolerance, so the amount you invest in equities won't keep you up at night. (If nothing else, the past few months have been a good test of what you can take.) The typical age-based allocation for a three-year-old might hold 75% in stocks. But many plans offer multiple age-based portfolios with varying levels of risk—New York's plan, for example, offers aggressive, moderate, and conservative portfolios, with the stock portion for that age ranging from 50% to 100%. Look closely too at how quickly the stock allocation shrinks over time. Some plans reduce the allocation at little bit each year, while others make adjustments every few years. For more help on choosing a 529 plan, see savingforcollege.com or the college saving section of cnnmoney.com.

Of course, if you child is graduating high school in the next year or two, you do need to stay safe. So be sure to boost your fixed-income allocation if you haven't already. One small break—you can change your 529 investments twice this year instead of just once. Meanwhile, start researching your financial aid options. (For more tips on easing the tuition squeeze, see this story. ) And remember, a college education is still the best investment you can make for your kids.