Contributions to 529 college savings plans are booming. The removal of the 2010 expiration date for the federal tax benefits has resulted in billions more flowing in. Increased competition for the new money has caused financial managers to lower their fees and offer more options. Saving remains the most effective way to deal with rapidly rising college costs.

There are many ways to save for college, but for the typical family, a 529 savings plan is the best choice.

Each state has its own plan, intended for residents. But you are free to participate in the plan of another state if you find it more to your liking. Kiplinger.com has comprehensive information and rates the best 529 savings plans.

If you pay college tuition, you may be able to save on your federal taxes. Here are the three main programs.

Hope Scholarship Tax Credit
This is a tax credit that is subtracted from taxes owed. A family must file a return and pay taxes. For 2006, the family may claim a credit of up to $1,650 for each eligible dependent in the first two years of college. The student must attend at least one-half time at an eligible institution leading to a degree. The exact amount of the credit depends on family income ($110,000 limit for a joint return), the amount of qualified tuition and fees, and amount of scholarships subtracted from tuition. The school is required to report net tuition on IRS form 1098-T. Taxpayers then fill out IRS form 8863 to claim the credit.

Lifetime Learning Tax Credit
This credit is similar to the Hope in regard to taxpayer status, income limits, the definition of net tuition paid, and the use of the 1098-T and IRS form 8863. However, in contrast to Hope, the Lifetime Learning credit has a $2,000 limit per family, is available for all years of postsecondary education, and can be used for non-degree courses.

Tuition and Fees Tax Deduction
This is a deduction, not a credit. It reduces the amount of income subject to tax, rather than the tax itself. It can be claimed even if deductions are not itemized. The maximum deduction is $4,000 applied to qualified tuition payments (less tax-free scholarships) at any eligible postsecondary institution. The income limit is $160,000 for joint return filers. As is the case for Hope and Lifetime Learning, the institution should indicate net tuition on IRS form 1098-T.
Important: Because this deduction was extended at the last minute, it does not appear on the paper 1040. To easily claim it, use IRS e-file. If you are submitting the paper 1040, the deduction is claimed on line 35, "Domestic production activities deduction." One other suggestion: If you want this deduction, don't file your return until mid-February after the IRS has had time to reprogram its computers to accept the deduction. For more information about these three federal tax benefits for families that paid tuition in 2006, go to IRS Publication 970, Tax Benefits for Higher Education, at http://www.irs.gov/pub/irs-pdf/p970.pdf.