(MONEY Magazine) – Frightened by the prospect of unrelenting tuition inflation, nearly 160,000 parents have latched on to plans that allow them to prepay college tuition for their kids. Should you? While the principle is the same, details of the programs vary. Usually, you pay a lump sum or make a series of payments -- the amount varies with the age of your child -- and are guaranteed up to four years of tuition at a state school when the child is ready to attend. Last year, for example, Michigan parents who put up $7,840 covered their newborn's tuition and fees for four years at any college in Michigan's public system starting in 2008. Assuming the current average four-year tuition -- $10,000 -- grows by 7% a year, four years starting in 2008 would cost $33,800. For the parents' original $7,840 to grow to that amount, it would take an after-tax compound annual return of 8.45%. Currently, Alabama, Florida, Ohio and Wyoming offer similar schemes. In Ohio, you buy credits at current prices ($33 each this year) for use any time after a two-year holding period. Seven other states -- Georgia, Maine, Massachusetts, Missouri, Oklahoma, Pennsylvania and West Virginia -- are contemplating plans. And a handful of individual schools offer their own versions. For example, at Indiana University, a public school with eight campuses, you can buy credits at current prices (three credit hours, enough for one class, recently cost $228). The plans offer a certain peace of mind, but before signing up, consider the following drawbacks: Cancellation costs. What happens if your child doesn't want to go to a state college? In most cases, you will get the equivalent of the prevailing state tuition, but that may turn out to represent less than you could have got investing your original payment in stocks or bonds. And if your child chooses not to attend college at all? Michigan and Ohio will give you an amount equal to tuition at the cheapest state school. Wyoming refunds your initial investment plus 4% compounded interest. Alabama and Florida will return only your initial investment, minus a cancellation fee. Usually, however, you can transfer the plan to another family member. (Wyoming, which has only one state-supported university, allows transfers, but not sales, to anyone you choose. Indiana University not only permits sales, it maintains a list of potential buyers.) Tax consequences. The IRS has ruled that the difference between your initial payment and the value of the future tuition is taxable income to your child during his or her college years. Thus an Alabama student whose parents laid out $3,857 this year to cover a projected $20,280 average tuition bill in 2008 will incur tax on $16,423, or on $4,106 a year. Moreover, you're liable for federal gift tax on whatever amount you put into the plan, a complex calculation that starts at 18% on the first $10,000 and goes up from there. You'll have to file Form 709, which will allow you to subtract the amount from the $192,800 tax credit allowed against your estate when you die. Default risk. Only Florida puts the state's full faith and credit behind its prepayment plan. In the other states, the legislatures are not obligated to maintain the plan's fiscal soundness. Should a shortfall occur, the plan's trustees would have to rely on political pressure to force the legislatures to honor the contracts. Such concerns led Tennessee to repeal its prepayment legislation.