Parents who qualify should take advantage of two federal tax credits for tuition costs. The HOPE Credit and Lifetime Learning Credit are almost as good as getting money outright, since they are a dollar-for-dollar reduction of the tax you owe. And you can use these credits against tuition payments that you make using student loans.

To qualify for these credits, your adjusted gross income must be less than $50,000 if you're single or less than $100,000 if you're married and filing a joint return.

The HOPE Credit lets you slash your taxes by up to $1,500 a year per child for qualified tuition and fees paid during the first two years of college -- 100 percent of the first $1,000 in tuition, and 50 percent of the next $1,000. That means you need to have at least $2,000 in tuition expenses to get the full credit.

The Lifetime Learning Credit currently maxes out at $1,000, regardless of how many children you have in college at one time. You can take 20 percent of up to $5,000 in qualified tuition and fees but you can't claim it in the same year that you take the Hope Credit for the same student. Starting in 2003, the Lifetime Learning Credit is set to increase to $2,000, or 20 percent of up to $10,000 in qualified expenses.

The education toward which you're applying a federal credit must occur within the tax year in which tuition was paid, or within the first three months of the following year. Since academic years aren't the same as calendar or tax years, you need to be careful how you claim a credit on your tax return.

If you make too much to qualify for the HOPE or Lifetime credits, you may qualify for a new education deduction compliments of the Tax Relief Act of 2001 that's only in effect from 2002 through 2005. The maximum deduction you can take is $3,000 in 2002 and 2003, and $4,000 in 2004 and 2005. To qualify, your adjusted gross income may not exceed $65,000 ($130,000 for married couples filing jointly). And, starting in 2004, if your AGI is above those limits but does not exceed $80,000 ($160,000 for joint filers), then you're entitled to a $2,000 deduction.

If your income qualifies you to take the HOPE and Lifetime credits as well as the new deduction, you may only take one for the same child in the same year. Remember, a deduction reduces your taxable income by a percent of every dollar, whereas a credit offers dollar-for-dollar reduction of the tax you owe. If you're in the 28 percent tax bracket, a $100 deduction means you'll pay $28 less in taxes, whereas a $100 credit means you'll pay $100 less.

For more specifics on the HOPE and Lifetime Learning credits, click here.

Next: Smart ways to handle loan repayment