We study the instantaneous nonlinear index change in Al0.2Ga0.8As waveguides below the two‐photon absorption edge and find &pgr; phase shifts with 80 pJ, 0.4 ps pulses at wavelengths near 1.6 &mgr;m. These large phase shifts are obtained with less than 1 dB of loss from multiphoton absorption. Our results indicate that AlGaAs waveguides, which have a mature fabrication technology, can be used as compact nonlinear elements in switching and quantum optics applications in the near‐infrared. Further optimization of the waveguide geometry should result in useful nonlinear phase shifts and low losses for pulse energies approaching a picojoule.