College costs are skyrocketing, prompting many parents to start saving as soon as the little one arrives. Uncle Sam offers several tax-favored ways to help.

The American opportunity credit, a reformulation of the previous Hope credit, covers costs for the first four years of higher education and is worth up to $2,500. Even better, a portion of the American opportunity credit is refundable, meaning even if you don't owe the IRS anything, you could get some cash back. And the lifetime learning credit, which could cut $2,000 off your tax bill, is still around as well.

Credits usually are more tax beneficial than deductions because credits cut your tax bill dollar-for-dollar. But don't discount the tuition and fees deduction. This tax break lets you subtract up to $4,000 of eligible schooling costs from your income.

And a Coverdell education savings account allows parents (or grandparents or even just friends) to put away up to $2,000 per year (total, not apiece) for a youngster's schooling.