Are there penalties for doing this? Do I have to pay taxes on the money that I withdraw? Is it more cost-effective to used subsidized loans?
"Not I" is incorrect. IRA distributions used for qualified education expenses (including tuition, fees, books, supplies, equipment and if a half-time or more student, room and board — note that these are NOT the same items that can be use for the various education credits!) are not subject to the 10% penalty. The distributions ARE taxed as ordinary income, however.

The plan administrator may withhold 20% (not 30%) towards your Federal income tax liability on the withdrawal. This may or may not be enough to cover your tax liability.

See IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf for further information.

As far as what method of financing your education makes more sense financially is a tougher question. Since you would forever lose the future tax-deferred gain on the IRA distributions that could be a MUCH more expensive way of financing your education in the long run. Assuming that you are young and that your IRA investments are in a reasonable mix of stocks, bonds, etc. for your age you can probably expect long-term annual growth of up to 8% on the IRA. However once you take a distribution that stops forever.

You can predict the total cost of using other means of financing your education pretty easily by completing a FAFSA and submitting it to the school's financial aid office.

In 30 years time, $5,000 left in an IRA could grow to over $50,000. Compare that to the cost of a subsidized loan and you'll probably discover that the loan is the MUCH cheaper way to go!
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10% penalty and income taxes at your current rate. The plan administrator will hold back roughly 30% of the money.