I know that some colleges are free, but are the free ones less prestigious?
Also, does one have to reside in Italy for a certain number of years to go to college there, or can the Italian citizen still qualify for the same benefits as an resident Italian citizen even though they live in another country?
Answer on How much does college cost in Italy for someone with Italian citizenship?
It depends on your qualifications and what kind of degree you're searching for. Italian universities (public) are almost free (fees range about 1000 eu +/- per year) for both Italian citizens and foreign citizens. Italian law states that non-Eu, Eu, and Italian citizens all have the same tuition. Public universities are not less prestigious. University of Bologna is the oldest in the world, besides the competition in the university system is not like it is in the States or in the UK. There are of course private universities, like in Milan, Rome, Art schools, American schools, etc that will have fees similar to American schools in the US.
You don't have to reside in Italy for any amount of time to attend school there. But, if you are an American high school graduate, you cannot apply to Italian University as a freshman. Italian admissions require that Americans complete an additional 60 credits in the US before applying as a freshman in Italian university. (This is because Italian high schools are specialized and incorporate a 5th year like the first year of college).
One way to get around this would be check out the university for foreigners in Perugia, (not sure tuition/admission requirements).
If you are an Italian citizen you qualify for the same rights as an Italian citizen in Italy.
This site has all the info you might need, with links.