(MONEY Magazine) – The fund scandal has revealed a surprising flaw in state-run college savings plans, which manage $26 billion in assets. Nearly every state has its own tax-free 529 plan; most are open to investors nationwide. To compete for assets, many state officials scrambled to ink deals with big fund companies to manage 529 money, as well as to administer and market the plans. Some of these deals were with companies under scrutiny now. Among them: Strong Capital, which managed money for the Wisconsin, Oregon and Nevada plans; Putnam in Ohio; and Alliance in Rhode Island.

Unfortunately, states should have paid more attention to the fine print. "Many state contracts make it difficult to fire the fund companies unless there is a material breach of fiduciary duty," explains Diana Cantor, head of the College Savings Plan Network. "But what specifically constitutes a breach is often unclear." So far, only Oregon, whose contract allowed it to fire Strong with just 60 days' notice, has dropped its plan provider because of the scandal. Nevada, which has a multi-manager plan, is pulling money out of Strong funds.

Other states are at least trying to limit the damage. Wisconsin, Strong's home state, is adding three fund providers to its 529 plan, including Vanguard and Legg Mason. (Strong will get a fee to administer these offerings.) Ohio, which has a contract with Putnam, is seeking to add a new fund provider next year.

College savers who don't want to wait can roll their money over into a different state's plan, says Joe Hurley of savingforcollege.com. Just keep in mind that you may be giving up an in-state tax deduction. Investors are allowed one such rollover annually per beneficiary. What if you've already used your rollover? Don't just cash out--you'll face taxes and penalties. Your best bet is to stay in your current 529 for now, but stash any new money in another state's plan, a Coverdell Education Savings Account or even a taxable account until your plan's problems have been resolved. --P.W.