You can't have it both ways.
On the one hand, you claim that investors did not get hurt had they invested in a basket of asset classes not limited to stocks. On the other hand, when I say that college costs have outpaced "investment returns" for a generation, you use the juicy returns of merely stocks (without the other investment classes that did not do as well) to try to disprove me. I stand by my claim that college costs have outpaced "investement returns", as defined by you, to be a basket of asset classes.
Second of all, you claim that college costs cannot continue to outpace "investment returns" because then only rich can afford it. Baloney. It's been happening for a generation. College costs are not limited by what someone can afford to pay but, rather, but what money is available to be borrowed with a guarantee from Uncle. The kids don't figure out that they often can't afford to pay for it until long after they sign the loan documents. As long as Uncle signs the loan guarantee, colleges will continue to charge as much as the debt limit allows. And politicians will keep raising the student loan debt limit because they mistakenly think that allowing students to borrow more money will fix the problem....never recognizing that this only allows colleges to operate even fatter and lazier.
Also, who is to say that investment returns have to be positive? Even if college costs do level off (unlikely, with the echo babyboomers at peak numbers, competing like we've never seen before) we could go through a period like 1966-1981 where "investments" (again, your definition including a basket of asset classes) lost purchasing power due to inflation (even if the S&P did have a 5% return with dividends invested....inflation ran more than 5% during that period, by the way...also back then there was no tax-free 529 so you had to pay taxes on that mere 5%).
So I stand by my original observation for a well managed national prepaid plan, perhaps with 5 or 6 different cost levels, with one federal set of rules. This would serve ALL college savers MUCH better than the current hodge-podge of state rules and asset-allocation schemes HOPING to stay ahead of the college cost wolf at the door. And while universities should be made to accept the prepaid amounts plus what managers can make it earn, this would not be that detrimental since, as you point out, baskets of asset classes well managed should keep the colleges whole. This, in return for allowing colleges to continue enjoying the easy money that the non-savers use for college....taxpayer guaranteed loans that no private sector bank would ever make (without the guarantee).