[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 2035 Introduced in Senate (IS)]







104th CONGRESS
  2d Session
                                S. 2035

   To invest in the future American workforce and to ensure that all 
 Americans have access to higher education by providing tax relief for 
   investment in a college education and by encouraging savings for 
                 college costs, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             August 2, 1996

   Mr. Biden introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
   To invest in the future American workforce and to ensure that all 
 Americans have access to higher education by providing tax relief for 
   investment in a college education and by encouraging savings for 
                 college costs, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Growing the Economy for Tomorrow: 
Assuring Higher Education is Affordable and Dependable Act''.

SEC. 2. FINDINGS.

    The Congress finds that--
            (1) since 1980 the cost of public college tuition and fees 
        has increased nearly three times faster than the median 
        household income;
            (2) in 1994, 8.3 percent of the median household income was 
        required to pay for the average cost of public college tuition 
        and fees whereas 4.5 percent of such income was required to pay 
        for such cost in 1980;
            (3) in 1994, 35.7 percent of the median household income 
        was required to pay for the average cost of private college 
        tuition and fees whereas 20.4 percent of such income was 
        required to pay for such cost in 1980;
            (4) educating America's future workforce is one of the best 
        investments we as a society can make and one of the best 
        measurements of future economic well-being; and
            (5) the Federal Government should renew and strengthen its 
        longstanding commitment to seeing that young people desiring to 
        go to college are not turned away because of the cost.

              TITLE I--TAX INCENTIVES FOR HIGHER EDUCATION

SEC. 100. AMENDMENT OF 1986 CODE.

    Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

           Subtitle A--Tax Relief for Higher Education Costs

SEC. 101. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 1 is 
amended by redesignating section 220 as section 221 and by inserting 
after section 219 the following new section:

``SEC. 220. HIGHER EDUCATION TUITION AND FEES; INTEREST ON STUDENT 
              LOANS.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction an amount equal to the sum of--
            ``(1) the qualified higher education expenses, plus
            ``(2) interest on qualified higher education loans,
paid by the taxpayer during the taxable year.
    ``(b) Qualified Higher Education Expenses.--For purposes of this 
section--
            ``(1) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition and fees required for 
                the enrollment or attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any dependent of the taxpayer with 
                        respect to whom the taxpayer is allowed a 
                        deduction under section 151,
                as an eligible student at an institution of higher 
                education.
                    ``(B) Exception for education involving sports, 
                etc.--Such term does not include expenses with respect 
                to any course or other education involving sports, 
                games, or hobbies unless such expenses--
                            ``(i) are part of a degree program, or
                            ``(ii) are deductible under this chapter 
                        without regard to this section.
                    ``(C) Exception for nonacademic fees.--Such term 
                does not include any student activity fees, athletic 
                fees, insurance expenses, or other expenses unrelated 
                to a student's academic course of instruction.
                    ``(D) Eligible student.--For purposes of 
                subparagraph (A), the term `eligible student' means a 
                student who meets the requirements of section 484(a)(1) 
                of the Higher Education Act of 1965 (20 U.S.C. 
                1091(a)(1)).
            ``(2) Dollar limitation.--
                    ``(A) In general.--The amount taken into account 
                under paragraph (1) for any taxable year shall not 
                exceed $10,000.
                    ``(B) Phase-in.--In the case of taxable years 
                beginning in 1996, 1997, and 1998, subparagraph (A) 
                shall be applied by substituting `$5,000' for 
                `$10,000'.
            ``(3) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--If the modified adjusted gross 
                income of the taxpayer for the taxable year exceeds 
                $70,000 ($100,000 in the case of a joint return), the 
                amount which would (but for this paragraph) be taken 
                into account under paragraph (1) shall be reduced (but 
                not below zero) by the amount which bears the same 
                ratio to the amount which would be taken into account 
                as such excess bears to $20,000.
                    ``(B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 1996, 
                the $70,000 and $100,000 amounts contained in 
                subparagraph (A) shall be increased by an amount equal 
                to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, except that section 
                        1(f)(3)(B) shall be applied by substituting 
                        `1995' for `1992'.
                    ``(C) Rounding.--If any amount as adjusted under 
                subparagraph (B) is not a multiple of $50, such amount 
                shall be rounded to the nearest multiple of $50 (or if 
                such amount is a multiple of $25, such amount shall be 
                rounded to the next highest multiple of $50).
                    ``(D) Modified adjusted gross income.--The term 
                `modified adjusted gross income' means the adjusted 
                gross income of the taxpayer for the taxable year 
                determined--
                            ``(i) without regard to this section and 
                        sections 911, 931, and 933, and
                            ``(ii) after the application of sections 
                        86, 135, 219, 221, and 469.
            ``(4) Institution of higher education.--The term 
        `institution of higher education' means an institution which--
                    ``(A) is described in section 481 of the Higher 
                Education Act of 1965 (20 U.S.C. 1088), and
                    ``(B) is eligible to participate in programs under 
                title IV of such Act.
    ``(c) Qualified Higher Education Loan.--For purposes of this 
section--
            ``(1) In general.--The term `qualified higher education 
        loan' means a loan to a student which is--
                    ``(A) made, insured, or guaranteed by the Federal 
                Government,
                    ``(B) made by a State or a political subdivision of 
                a State,
                    ``(C) made from the proceeds of a qualified student 
                loan bond under section 144(b), or
                    ``(D) made by an institution of higher education 
                (as defined in section 1201(a) of the Higher Education 
                Act of 1965 (20 U.S.C. 1141(a))).
            ``(2) Limitation.--
                    ``(A) In general.--The amount of interest on a 
                qualified higher education loan which is taken into 
                account under subsection (a)(2) shall be reduced by the 
                amount which bears the same ratio to such amount of 
                interest as--
                            ``(i) the proceeds from such loan not used 
                        for qualified higher education expenses, bears 
                        to
                            ``(ii) the total proceeds from such loan.
                    ``(B) Qualified higher education expenses.--For 
                purposes of subparagraph (A), the term `qualified 
                higher education expenses' has the meaning given such 
                term by subsection (b), except that--
                            ``(i) such term shall include reasonable 
                        living expenses while away from home, and
                            ``(ii) the limitations of paragraphs (2) 
                        and (3) of subsection (b) shall not apply.
    ``(d) Coordination With Other Provisions.--
            ``(1) No double benefit.--
                    ``(A) In general.--No deduction shall be allowed 
                under subsection (a) for qualified higher education 
                expenses or interest on qualified higher education 
                loans with respect to which a deduction is allowed 
                under any other provision of this chapter.
                    ``(B) Payments from excludable amounts.--A 
                deduction shall be allowed under subsection (a)(1) for 
                qualified higher education expenses only to the extent 
                the amount of such expenses exceeds the sum of--
                            ``(i) amounts excludable under section 135 
                        for the taxable year, plus
                            ``(ii) the excess of--
                                    ``(I) amounts excludable under 
                                sections 117 and 221(d)(2) for the 
                                taxable year, reduced (but not below 
                                zero) by--
                                    ``(II) reasonable expenses paid or 
                                incurred during the taxable year for 
                                meals and lodging of the taxpayer, 
                                spouse, or dependent while an eligible 
                                student at an institution of higher 
                                education, plus
                            ``(iii) educational assistance allowances 
                        under chapter 30, 31, 32, 34, or 35 of title 
                        38, United States Code, plus
                            ``(iv) payments (other than a gift, 
                        bequest, devise, or inheritance within the 
                        meaning of section 102(a)) for educational 
                        expenses, or attributable to attendance at an 
                        eligible educational institution, which are 
                        exempt from income taxation by any law of the 
                        United States.
            ``(2) Qualified residence interest.--If a deduction is 
        allowed under subsection (a)(2) for interest which is also 
        qualified residence interest under section 163(h), such 
        interest shall not be taken into account under section 163(h).
    ``(e) Special Rules.--
            ``(1) Election.--If a deduction is allowable under more 
        than one provision of this chapter with respect to qualified 
        higher education expenses, the taxpayer may elect the provision 
        under which the deduction is allowed.
            ``(2) Limitation on taxable year of deduction.--
                    ``(A) In general.--A deduction shall be allowed 
                under subsection (a)(1) for any taxable year only to 
                the extent the qualified higher education expenses are 
                in connection with attendance at an institution of 
                higher education during the taxable year.
                    ``(B) Certain prepayments allowed.--Subparagraph 
                (A) shall not apply to qualified higher education 
                expenses paid during a taxable year which are in 
                connection with attendance at an institution of higher 
                education which begins during the first 2 months of the 
                following taxable year.
            ``(3) No deduction for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703), this section shall apply only if the 
        taxpayer and his spouse file a joint return for the taxable 
        year.
            ``(4) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out 
        this section, including regulations requiring recordkeeping and 
        information reporting.''
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) is amended by inserting after paragraph (15) the following new 
paragraph:
            ``(16) Higher education tuition and fees.--The deduction 
        allowed by section 220.''
    (c) Conforming Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 is amended by striking the item relating to 
section 220 and inserting:

                              ``Sec. 220. Higher education tuition and 
                                        fees; interest on student 
                                        loans.
                              ``Sec. 221. Cross reference.''
    (d) Effective Dates.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 102. EXCLUSION FOR SCHOLARSHIPS AND FELLOWSHIPS.

    (a) In General.--Subsections (a) and (b) of section 117 (defining 
qualified scholarships) are amended to read as follows:
    ``(a) General Rule.--Gross income does not include any amount 
received as a qualified scholarship or fellowship by an individual who 
is a candidate for a degree at an educational organization described in 
section 170(b)(1)(A)(ii).
    ``(b) Qualified Scholarship or Fellowship.--For purposes of this 
section--
            ``(1) In general.--The term `qualified scholarship or 
        fellowship' means any amount received--
                    ``(A) as a scholarship at an educational 
                organization described in section 170(b)(1)(A)(ii), or
                    ``(B) as a fellowship grant.
        Such term includes the value of any contributed services and 
        accommodations included in such scholarship or grant.
            ``(2) Additional expenses.--The term `qualified scholarship 
        or fellowship' includes any amount received to cover expenses 
        for travel, research, clerical help, or equipment which are 
        incident to a scholarship or fellowship grant described in 
        paragraph (1), but only to the extent that the amount is so 
        expended by the recipient.''
    (b) Extension to Certain Individuals Who Are Not Degree 
Candidates.--
            (1) In general.--Section 117 is amended by adding at the 
        end the following new subsection:
    ``(e) Individuals Who Are Not Degree Candidates.--
            ``(1) In general.--Subsection (a) shall apply to an 
        individual who is not a candidate for a degree at an 
        educational organization described in section 170(b)(1)(A)(ii) 
        if the grantor of the scholarship is--
                    ``(A) an organization described in section 
                501(c)(3) which is exempt from tax under section 
                501(a),
                    ``(B) a foreign government,
                    ``(C) an international organization, or a 
                binational or multinational educational and cultural 
                foundation or commission created or continued pursuant 
                to the Mutual Educational and Cultural Exchange Act of 
                1961, or
                    ``(D) the United States or an instrumentality or 
                agency thereof or a State or possession of the United 
                States or any political subdivision thereof.
            ``(2) Limitation.--The amounts described in subsection 
        (b)(1) which may be excluded under subsection (a) in the case 
        of an individual described in paragraph (1) shall not exceed 
        the product of--
                    ``(A) $300, and
                    ``(B) the number of months for which the recipient 
                received amounts under the scholarship or fellowship 
                grant during the taxable year, except that not more 
                than 36 months (whether or not consecutive) may be 
                taken into account under this subsection with respect 
                to any individual for all taxable years.''
            (2) Conforming amendment.--The second sentence of section 
        1441(b) is amended to read as follows: ``The items of income 
        referred to in subsection (a) from which tax shall be deducted 
        and withheld at the rate of 14 percent are amounts which are 
        received by a nonresident alien individual who is temporarily 
        present in the United States as a nonimmigrant under 
        subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the 
        Immigration and Nationality Act and which are incident to a 
        qualified scholarship or fellowship to which section 117(a) 
        applies, but only to the extent such amounts are includible in 
        gross income.''
    (c) Requirement of Future Service as a Federal Employee.--Section 
117(c) is amended--
            (1) by striking ``Subsections'' and inserting:
            ``(1) In general.--Subsections'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Federal grants for tuition and related expenses not 
        includable merely because there is requirement of future 
        service as federal employee.--
                    ``(A) In general.--If--
                            ``(i) an amount received by an individual 
                        under a Federal program would be excludable 
                        under subsection (a) as a scholarship or 
                        fellowship grant but for the fact that the 
                        individual is required to perform future 
                        service as a Federal employee, and
                            ``(ii) the individual establishes that, in 
                        accordance with the terms of the grant, such 
                        amount was used for qualified tuition and 
                        related expenses,
                gross income shall not include such amount.
                    ``(B) Qualified tuition and related expenses 
                defined.--For purposes of this paragraph--
                            ``(i) In general.--The term `qualified 
                        tuition and related expenses' means--
                                    ``(I) tuition and fees required for 
                                the enrollment or attendance of a 
                                student at an institution of higher 
                                education, and
                                    ``(II) fees, books, supplies, and 
                                equipment required for courses of 
                                instruction at an institution of higher 
                                education.
                            ``(ii) Institution of higher education.--
                        The term `institution of higher education' 
                        means an educational institution in any State 
                        which--
                                    ``(I) admits as regular students 
                                only individuals having a certificate 
                                of graduation from a high school, or 
                                the recognized equivalent of such a 
                                certificate,
                                    ``(II) is legally authorized within 
                                such State to provide a program of 
                                education beyond high school,
                                    ``(III) provides an educational 
                                program for which it awards a 
                                bachelor's or higher degree, provides a 
                                program which is acceptable for full 
                                credit toward such a degree, or offers 
                                a program of training to prepare 
                                students for gainful employment in a 
                                recognized health profession, and
                                    ``(IV) is a public or other 
                                nonprofit institution.
                    ``(C) Service as federal employee.--For purposes of 
                this paragraph, service in a health manpower shortage 
                area shall be treated as service as a Federal 
                employee.''
    (d) Conforming Amendments.--
            (1)(A) The heading for section 117 is amended by adding 
        ``or fellowships'' after ``scholarships''.
            (B) The item relating to section 117 in the table of 
        sections for part III of subchapter B of chapter 1 is amended 
        by inserting ``or fellowships'' after ``scholarships''.
            (2) Sections 74(a) and 135(d)(1)(A) are each amended by 
        inserting ``or fellowships'' after ``scholarships''.
            (3) Sections 4941(d)(2)(G)(ii) and 4945(g)(1) are each 
        amended by striking ``which would be subject to the provisions 
        of section 117(a) (as in effect on the day before the date of 
        the enactment of the Tax Reform Act of 1986)'' and inserting 
        ``which are subject to the provisions of section 117(a)''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 103. PERMANENT EXCLUSION FOR EDUCATIONAL ASSISTANCE.

    (a) In General.--Section 127 (relating to exclusion for educational 
assistance programs) is amended by striking subsection (d) and by 
redesignating subsection (e) as subsection (d).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

       Subtitle B--Encouraging Savings for Higher Education Costs

SEC. 111. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY 
              TO PAY HIGHER EDUCATION EXPENSES.

    (a) In General.--Paragraph (2) of section 72(t) (relating to 
exceptions to 10-percent additional tax on early distributions from 
qualified retirement plans) is amended by adding at the end the 
following new subparagraph:
            ``(D) Distributions from certain plans for educational 
        expenses.--Distributions to an individual from an individual 
        retirement plan, or from amounts attributable to employer 
        contributions made pursuant to elective deferrals described in 
        subparagraph (A) or (C) of section 402(g)(3) or section 
        501(c)(18)(D)(iii), to the extent such distributions do not 
        exceed the qualified higher education expenses (as defined in 
        paragraph (6)) of the taxpayer for the taxable year.''
    (b) Definition.--Section 72(t) is amended by adding at the end the 
following new paragraph:
            ``(6) Qualified higher education expenses.--For purposes of 
        paragraph (2)(D)--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition, fees, books, 
                supplies, and equipment required for the enrollment or 
                attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any child (as defined in section 
                        151(c)(3)), grandchild, or ancestor of the 
                        taxpayer or the taxpayer's spouse,
                at an eligible educational institution (as defined in 
                section 135(c)(3)).
                    ``(B) Coordination with other exclusions.--The 
                amount of qualified higher education expenses for any 
                taxable year shall be reduced by the sum of--
                            ``(i) any amount excludable from gross 
                        income under section 135, plus
                            ``(ii) the excess of--
                                    ``(I) amounts excludable under 
                                section 221(d)(2) for the taxable year, 
                                reduced (but not below zero) by--
                                    ``(II) reasonable expenses paid or 
                                incurred during the taxable year for 
                                meals and lodging of the taxpayer, 
                                spouse, or dependent while an eligible 
                                student at an institution of higher 
                                education.
                For purposes of this subparagraph, the terms `eligible 
                student' and `institution of higher education' have the 
                meanings given such terms by section 220.''
    (c) Conforming Amendments.--
            (1) Section 401(k)(2)(B)(i) is amended by striking ``or'' 
        at the end of subclause (III), by striking ``and'' at the end 
        of subclause (IV) and inserting ``or'', and by inserting after 
        subclause (IV) the following new subclause:
                                    ``(V) the date on which 
                                distributions for qualified higher 
                                education expenses (as defined in 
                                section 72(t)(6)) are made, and''.
            (2) Section 403(b)(11) is amended by striking ``or'' at the 
        end of subparagraph (A), by striking the period at the end of 
subparagraph (B) and inserting ``, or'', and by inserting after 
subparagraph (B) the following new subparagraph:
                    ``(C) for the payment of qualified higher education 
                expenses (as defined in section 72(t)(6)).''
    (d) Effective Date.--The amendments made by this section shall 
apply to payments and distributions after the date of the enactment of 
this Act.

SEC. 112. EDUCATION SAVINGS ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 1 (relating to 
additional itemized deductions for individuals), as amended by section 
101, is amended by redesignating section 221 as section 222 and by 
inserting after section 220 the following new section:

``SEC. 221. EDUCATION SAVINGS ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction the sum of--
            ``(1) amounts paid in cash, and
            ``(2) the fair market value of stocks, bonds, or other 
        securities which are readily tradeable on an established 
        securities market and which are transferred,
during the calendar year which ends with or within the taxable year by 
such individual to an education savings account established for the 
purpose of accumulating funds to pay the educational expenses of an 
eligible individual.
    ``(b) Limitations.--
            ``(1) Maximum deduction per account.--The amount allowable 
        as a deduction under subsection (a) to an individual for 
        amounts paid or transferred to an education savings account for 
        any calendar year shall not exceed $2,000.
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--If the modified adjusted gross 
                income of the taxpayer for the taxable year exceeds 
                $70,000 ($100,000 in the case of a joint return), the 
                amount which would (but for this paragraph) be taken 
                into account under subsection (a) shall be reduced (but 
                not below zero) by the amount which bears the same 
                ratio to the amount which would be taken into account 
                as such excess bears to $20,000.
                    ``(B) Modified adjusted gross income.--The term 
                `modified adjusted gross income' means the adjusted 
                gross income of the taxpayer for the taxable year 
                determined--
                            ``(i) without regard to this section and 
                        sections 220, 911, 931, and 933, and
                            ``(ii) after the application of sections 
                        86, 135, 219, and 469.
                    ``(C) Nondeductible contributions.--

                                ``For nondeductible contributions to 
education savings accounts, see subsection (k).
            ``(3) Limitations on accounts.--
                    ``(A) Account may not be established for benefit of 
                more than 1 individual.--An education savings account 
                may not be established for the benefit of more than 1 
                individual.
                    ``(B) Eligible individual treated as eligible 
                individual only with respect to 1 account.--If, at any 
                time during a calendar year, 2 or more education 
                savings accounts are maintained for the benefit of an 
                eligible individual, such individual shall be treated 
                as an eligible individual for the calendar year only 
                with respect to the first of such accounts.
            ``(4) No deduction after beneficiary attains age 19.--No 
        deduction shall be allowed for any contribution to an education 
        savings account established for the benefit of an eligible 
        individual who has attained age 19 before the close of the 
        calendar year in which such contribution is made.
            ``(5) Adjustment of dollar amount limitations for 
        inflation.--
                    ``(A) In general.--In the case of any calendar year 
                after 1996, the $70,000 and $100,000 amounts under 
                paragraph (2), shall each be increased by an amount 
                equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for such 
                        calendar year by substituting `calendar year 
                        1995' for `calendar year 1992' in subparagraph 
                        (B) thereof.
                    ``(B) Rounding.--The rounding rules of section 
                220(b)(3)(C) shall apply to any increase under 
                subparagraph (A).
            ``(6) Rollover contributions.--Paragraph (1) shall not 
        apply to any rollover contribution described in subsection 
        (c)(2)(F)(i)(II) or (d)(3)(B).
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Eligible individual.--The term `eligible individual' 
        means an individual who is--
                    ``(A) a child (within the meaning of section 
                153(e)(3)) of the taxpayer or of a brother, sister, 
                stepbrother, or stepsister of the taxpayer,
                    ``(B) an individual with respect to whom the 
                taxpayer has been appointed guardian by a court of 
                competent jurisdiction, or
                    ``(C) a descendant of a child of the taxpayer.
            ``(2) Education savings account.--The term `education 
        savings account' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        educational expenses of an eligible individual, but only if the 
        written governing instrument creating the trust meets the 
        following requirements:
                    ``(A) No contribution will be accepted unless it is 
                in cash, stocks, bonds, or other securities which are 
                readily tradeable on an established securities market, 
                and, except in the case of contributions from another 
                education savings account, contributions will not be 
                accepted for the taxable year in excess of $2,000.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                the person will administer the trust will be consistent 
                with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts (other than contracts the 
                beneficiary of which is the trust and the face amount 
                of which does not exceed the amount by which the 
                maximum amount which can be contributed to the account 
                exceeds the sum of the amounts contributed to the 
                account for all taxable years).
                    ``(D) The assets of the account may be invested in 
                accordance with the direction of the individual 
                contributing to the account, but, if more than one 
                individual has made contributions to the account, the 
                consent of all such individuals shall be required for 
                any such direction.
                    ``(E) The assets of the trust shall not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(F)(i) Any balance in the account on the day 
                after the date on which the individual for whose 
                benefit the trust is established attains age 30 (or, if 
                earlier, the date on which such individual dies) shall 
                be distributed within 30 days of such date--
                            ``(I) in accordance with paragraph (5) to 
                        each of the individuals who have contributed to 
                        the trust, or
                            ``(II) as directed by such individuals, to 
                        another education savings account established 
                        for the benefit of an eligible individual who 
                        has not attained age 30 or to an eligible 
                        educational institution.
                    ``(ii) If an individual is at least a half-time 
                student at an eligible educational institution at the 
                time the individual attains age 30, clause (i) shall 
                not apply until the individual ceases to be such a 
                student.
            ``(3) Time when contributions deemed made.--A taxpayer 
        shall be deemed to have made a contribution on the last day of 
        the preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than the 
        time prescribed by law for filing the return for such taxable 
        year (including extensions thereof).
            ``(4) Stock, etc., to be valued as of transfer date.--The 
        fair market value of stocks, bonds, and other securities shall 
        be determined as of the date on which they are transferred to 
        the account. If the date of transfer falls on a Saturday, 
        Sunday, or public legal holiday, then the fair market value 
        shall be determined by reference to the last preceding day on 
        which they could have been traded on an established securities 
        market.
            ``(5) Distribution of balance in account to contributors.--
        The Secretary shall prescribe regulations describing the manner 
        in which any balance in the education savings account shall be 
        distributed under paragraph (2)(F)(i)(I) among the contributors 
        to the account. Any division of the balance in the account 
        shall reflect--
                    ``(A) the amount of net income of the account which 
                is attributable to the contributions of each such 
                individual, and
                    ``(B) a proper allocation of any amounts previously 
                distributed from the account for educational expenses 
                among the contributions which were made before any such 
                distribution (including the net income of the account 
                which was attributable to such contributions and earned 
                before any such distribution).
            ``(6) Educational expenses.--The term `educational 
        expenses' means--
                    ``(A) tuition and fees required for the enrollment 
                or attendance of a student at an eligible educational 
                institution,
                    ``(B) fees, books, supplies, and equipment required 
                for courses of instruction at an eligible educational 
                institution, and
                    ``(C) a reasonable allowance for meals and lodging 
                while attending an eligible educational institution.
            ``(7) Eligible educational institution.--The term `eligible 
        educational institution' means an institution of higher 
        education described in section 481(a) of the Higher Education 
        Act of 1965.
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an education 
        savings account shall be included in gross income of the payee 
        or distributee for the taxable year in which the payment or 
        distribution is received to the extent such amount is not the 
        return of a contribution for which no deduction was allowed 
        under subsection (a) (as determined in the same manner as 
        provided under section 72).
            ``(2) Distribution used to pay educational expenses.--
        Paragraph (1) shall not apply to any payment or distribution 
        out of an education savings account to the extent such payment 
        or distribution is used exclusively to pay the educational 
        expenses incurred by the individual for whose benefit the 
        account is established.
            ``(3) Distributions to another account or to eligible 
        educational institution.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any distribution under subsection (c)(2)(F)(i)(II).
                    ``(B) Rollover contributions.--Paragraph (1) shall 
                not apply to any distribution--
                            ``(i) from an education savings account of 
                        the individual for whose benefit the account is 
                        established which, within 60 days of such 
                        distribution, is paid to another such account 
                        of such individual, or
                            ``(ii) which is not described in 
                        subparagraph (A) and which, as directed by 
                        individuals who have contributed to the 
                        account, is paid to another education savings 
                        account established for the benefit of an 
                        eligible individual who is a member of the 
                        family (within the meaning of section 
                        2032A(e)(2)) of the account holder.
            ``(4) Excess contributions returned before due date of 
        return.--Paragraph (1) does not apply to the distribution of 
        any contribution paid during a taxable year to an education 
        savings account to the extent that such contribution exceeds 
        the amount allowable as a deduction under subsection (a) if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) no deduction is allowed under subsection (a) 
                with respect to such excess contribution, and
                    ``(C) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (C) shall be included 
        in the gross income of the individual for the taxable year in 
        which such excess contribution was made.
    ``(e) Tax Treatment of Accounts.--
            ``(1) Exemption from tax.--An education savings account is 
        exempt from taxation under this subtitle unless such account 
        has ceased to be an education savings account by reason of 
        paragraph (2) or (3). Notwithstanding the preceding sentence, 
        any such account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business income of 
        charitable, etc. organizations).
            ``(2) Loss of exemption of account where individual engages 
        in prohibited transaction.--
                    ``(A) In general.--If the individual for whose 
                benefit an education savings account is established or 
                any individual who contributes to such account engages 
                in any transaction prohibited by section 4975 with 
                respect to the account, the account shall cease to be 
                an education savings account as of the first day of the 
                taxable year (of the individual so engaging in such 
                transaction) during which such transaction occurs.
                    ``(B) Account treated as distributing all its 
                assets.--In any case in which any account ceases to be 
                an education savings account by reason of subparagraph 
                (A) as of the first day of any taxable year, paragraph 
                (1) of subsection (d) shall apply as if there was a 
                distribution on such first day in an amount equal to 
                the fair market value (on such first day) of all assets 
                in the account (on such first day).
            ``(3) Effect of pledging account as security.--If, during 
        any taxable year, the individual for whose benefit an education 
        savings account is established, or any individual who 
        contributes to such account, uses the account or any portion 
        thereof as security for a loan, the portion so used shall be 
        treated as distributed to the individual so using such portion.
    ``(f) Additional Tax on Certain Amounts Included in Gross Income.--
            ``(1) Distribution not used for educational expenses.--In 
        the case of any payment or distribution to which subsection 
        (d)(1) applies, the tax liability of each payee or distributee 
        under this chapter for the taxable year in which the payment or 
        distribution is received shall be increased by an amount equal 
        to 10 percent of the amount of the distribution which is 
        includible in the gross income of such payee or distributee for 
        such taxable year.
            ``(2) Disqualification cases.--If an amount is includible 
        in the gross income of an individual for a taxable year because 
        such amount is required to be treated as a distribution under 
        paragraph (2) or (3) of subsection (e), such individual's tax 
        liability under this chapter for such taxable year shall be 
        increased by an amount equal to 10 percent of such amount 
        required to be treated as a distribution and included in the 
        individual's gross income.
            ``(3) Disability or death cases and unemployment.--
        Paragraphs (1) and (2) shall not apply if the payment or 
        distribution--
                    ``(A) is made after the individual for whose 
                benefit the education savings account becomes disabled 
                within the meaning of section 72(m)(7) or dies, or
                    ``(B) is made to an individual who is a contributor 
                after separation from employment if--
                            ``(i) such individual has received 
                        unemployment compensation for 12 consecutive 
                        weeks under any Federal or State unemployment 
                        compensation law by reason of such separation, 
                        and
                            ``(ii) such distributions are made during 
                        any taxable year during which such unemployment 
                        compensation is paid or the succeeding taxable 
                        year.
        To the extent provided in regulations, a self-employed 
        individual shall be treated as meeting the requirements of 
        subparagraph (B)(i) if, under Federal or State law, the 
        individual would have received unemployment compensation but 
        for the fact the individual was self-employed.
    ``(g) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(h) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of such 
account are held by a bank (as defined in section 408(n)) or another 
person who demonstrates, to the satisfaction of the Secretary, that the 
manner in which he will administer the account will be consistent with 
the requirements of this section, and if the custodial account would, 
except for the fact that it is not a trust, constitute an education 
savings account described in subsection (c)(2). For purposes of this 
title, in the case of a custodial account treated as a trust by reason 
of the preceding sentence, the custodian of such account shall be 
treated as the trustee thereof.
    ``(i) Reports.--The trustee of an education savings account shall 
make such reports regarding such account to the Secretary and to the 
individual for whose benefit the account is maintained with respect to 
contributions, distributions, and such other matters as the Secretary 
may require under regulations. The reports required by this subsection 
shall be filed at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required by those 
regulations.
    ``(j) Coordination With Federal Means-Tested Programs.--For 
purposes of any Federal means-tested program, the balance in any 
education savings account (and any income from such account) shall not 
be treated as an asset (or income) of the individual for whom the 
account is established or any parent of such individual.
    ``(k) Definitions and Rules Relating to Nondeductible Contributions 
to Education Savings Accounts.--
            ``(1) In general.--Subject to the provisions of this 
        subsection, designated nondeductible contributions may be made 
        on behalf of an individual to an education savings account.
            ``(2) Limits on amounts which may be contributed.--
                    ``(A) In general.--The amount of the designated 
                nondeductible contributions made on behalf of any 
                individual for any taxable year shall not exceed the 
                nondeductible limit for such taxable year.
                    ``(B) Nondeductible limit.--For purposes of this 
                paragraph--
                            ``(i) In general.--The term `nondeductible 
                        limit' means the excess of--
                                    ``(I) the amount allowable as a 
                                deduction under this section 
                                (determined without regard to 
                                subsection (b)(2)), over
                                    ``(II) the amount allowable as a 
                                deduction under this section 
                                (determined with regard to subsection 
                                (b)(2)).
                            ``(ii) Taxpayer may elect to treat 
                        deductible contributions as nondeductible.--If 
                        a taxpayer elects not to deduct an amount which 
                        (without regard to this clause) is allowable as 
                        a deduction under this section for any taxable 
                        year, the nondeductible limit for such taxable 
                        year shall be increased by such amount.
                    ``(C) Designated nondeductible contributions.--
                            ``(i) In general.--For purposes of this 
                        paragraph, the term `designated nondeductible 
                        contribution' means any contribution to an 
                        education savings account for the taxable year 
                        which is designated (in such manner as the 
                        Secretary may prescribe) as a contribution for 
                        which a deduction is not allowable under this 
                        section.
                            ``(ii) Designation.--Any designation under 
                        clause (i) shall be made on the return of tax 
                        imposed by chapter 1 for the taxable year.
            ``(3) Time when contributions made.--In determining for 
        which taxable year a designated nondeductible contribution is 
        made, the rule of subsection (c)(3) shall apply.
            ``(4) Individual required to report amount of designated 
        nondeductible contributions.--
                    ``(A) In general.--Any individual who--
                            ``(i) makes a designated nondeductible 
                        contribution to any education savings account 
                        for any taxable year, or
                            ``(ii) receives any amount from any 
                        education savings account for any taxable year,
                shall include on his return of the tax imposed by 
                chapter 1 for such taxable year and any succeeding 
                taxable year (or on such other form as the Secretary 
                may prescribe for any such taxable year) information 
                described in subparagraph (B).
                    ``(B) Information required to be supplied.--The 
                following information is described in this 
                subparagraph:
                            ``(i) The amount of designated 
                        nondeductible contributions for the taxable 
                        year.
                            ``(ii) The amount of distributions from 
                        education savings accounts for the taxable 
                        year.
                            ``(iii) The excess (if any) of--
                                    ``(I) the aggregate amount of 
                                designated nondeductible contributions 
                                for all preceding taxable years, over
                                    ``(II) the aggregate amount of 
                                distributions from education savings 
                                accounts which was excludable from 
                                gross income for such taxable years.
                            ``(iv) The aggregate balance of the 
                        education savings account of the individual as 
                        of the close of the calendar year in which the 
                        taxable year begins.
                            ``(v) Such other information as the 
                        Secretary may prescribe.''
    (b) Deduction Allowed in Arriving at Adjusted Gross Income.--
Paragraph (7) of section 62(a) (relating to retirement savings) is 
amended--
            (1) by inserting ``or education'' after ``retirement'' in 
        the heading of such paragraph, and
            (2) by inserting before the period at the end the 
        following: ``and the deduction allowed by section 221 (relating 
        to education savings accounts)''.
    (c) Tax on Excess Contributions.--Section 4973 (relating to tax on 
excess contributions to individual retirement accounts, certain section 
403(b) contracts, and certain individual retirement annuities) is 
amended--
            (1) by inserting ``education savings accounts,'' after 
        ``accounts,'' in the heading of such section,
            (2) by striking ``or'' at the end of paragraph (1) of 
        subsection (a),
            (3) by redesignating paragraph (2) of subsection (a) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following new paragraph:
            ``(2) an education savings account (within the meaning of 
        section 221(c)(2)), or'', and
            (4) by adding at the end the following new subsection:
    ``(d) Excess Contributions to Education Savings Accounts.--For 
purposes of this section, in the case of an education savings account, 
the term `excess contributions' means the amount by which the amount 
contributed for the taxable year to the account exceeds the amount 
allowable as a deduction under section 221 for such taxable year. For 
purposes of this subsection, any contribution which is distributed out 
of the education savings account in a distribution to which section 
221(d)(4) applies shall be treated as an amount not contributed.''
    (d) Contribution Not Subject to Gift Tax.--Section 2503 (relating 
to taxable gifts) is amended by adding at the end the following new 
subsection:
    ``(h) Education Savings Accounts.--Any contribution (including any 
rollover contribution) made by an individual to an education savings 
account described in section 221(c)(2) which is allowable as a 
deduction under section 221 shall not be treated as a transfer of 
property by gift for purposes of this chapter.''
    (e) Tax on Prohibited Transactions.--Section 4975 (relating to 
prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(4) Special rule for education savings accounts.--An 
        individual for whose benefit an education savings account is 
        established and any contributor to such account shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be an education savings 
        account by reason of the application of section 221(e)(2)(A) to 
        such account.'', and
            (2) by inserting ``, an education savings account described 
        in section 221(c)(2),'' in subsection (e)(1) after ``described 
        in section 408(a)''.
    (f) Failure To Provide Reports on Education Savings Accounts.--
Section 6693 (relating to failure to provide reports on individual 
retirement accounts or annuities) is amended--
            (1) by inserting ``or on education savings accounts'' after 
        ``annuities'' in the heading of such section, and
            (2) by adding at the end of subsection (a) the following 
        new sentence: ``The person required by section 221(i) to file a 
        report regarding an education savings account at the time and 
        in the manner required by such section shall pay a penalty of 
        $50 for each failure, unless it is shown that such failure is 
        due to reasonable cause.''
    (g) Special Rule for Determining Amounts of Support for 
Dependent.--Subsection (b) of section 152 (relating to definition of 
dependent) is amended by adding at the end the following new paragraph:
            ``(6) A distribution from an education savings account 
        described in section 221(c)(2) to the individual for whose 
        benefit such account has been established shall not be taken 
        into account in determining support for purposes of this 
        section to the extent such distribution is excluded from gross 
        income of such individual under section 221(d)(2).''
    (h) Clerical Amendments.--
            (1) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        221 and inserting the following new items:

                              ``Sec. 221. Education savings accounts.
                              ``Sec. 222. Cross reference.''
            (2) The table of sections for chapter 43 is amended by 
        striking the item relating to section 4973 and inserting the 
        following new item:

                              ``Sec. 4973. Tax on excess contributions 
                                        to individual retirement 
                                        accounts, education savings 
                                        accounts, certain 403(b) 
                                        contracts, and certain 
                                        individual retirement 
                                        annuities.''
            (3) The table of sections for subchapter B of chapter 68 is 
        amended by striking the item relating to section 6693 and 
        inserting the following new item:

                              ``Sec. 6693. Failure to provide reports 
                                        on individual retirement 
                                        accounts or annuities or on 
                                        education savings accounts.''
    (i) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 113. INCREASE IN INCOME LIMITS FOR SAVINGS BOND EXCLUSION.

    (a) In General.--Paragraph (2) of section 135(b) is amended to read 
as follows:
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--If the modified adjusted gross 
                income of the taxpayer for the taxable year exceeds 
                $70,000 ($100,000 in the case of a joint return), the 
                amount which would (but for this paragraph) be 
                excludable from gross income under subsection (a) shall 
                be reduced (but not below zero) by the amount which 
                bears the same ratio to the amount which would be so 
                excludable as such excess bears to $20,000.
                    ``(B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 1996, 
                the $70,000 and $100,000 amounts contained in 
                subparagraph (A) shall be increased by an amount equal 
                to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `1995' for `1992' in subparagraph 
                        (B) thereof.
                    ``(C) Rounding.--If any amount as adjusted under 
                subparagraph (B) is not a multiple of $50, such amount 
                shall be rounded to the nearest multiple of $50 (or if 
                such amount is a multiple of $25, such amount shall be 
                rounded to the next highest multiple of $50).''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 114. TAX TREATMENT OF STATE PREPAID TUITION PLANS.

    (a) In General.--Subchapter F of chapter 1 (relating to exempt 
organizations) is amended by adding at the end the following new part:

                ``PART VIII--STATE PREPAID TUITION PLANS

                              ``Sec. 529. State prepaid tuition plans.

``SEC. 529. STATE PREPAID TUITION PLANS.

    ``(a) General Rule.--A qualified State prepaid tuition plan is 
exempt from tax under this subtitle. Notwithstanding the preceding 
sentence, such plan is subject to the taxes imposed by section 511 
(relating to imposition of tax on unrelated business income of 
charitable, etc. organizations).
    ``(b) Deferral of Tax on Purchasers and Beneficiaries.--No amount 
shall be included in gross income of a purchaser or beneficiary of any 
interest in a qualified State prepaid tuition plan until such amount is 
received from the plan (whether in cash or otherwise).
    ``(c) Qualified State Prepaid Tuition Plan.--For purposes of this 
section, the term `qualified State prepaid tuition plan' means a 
corporation or trust established by a State or instrumentality thereof 
pursuant to a program established by State law which--
            ``(1) allows an individual to make advance payments to the 
        corporation or trust on behalf of a designated beneficiary, and
            ``(2) provides that such payments--
                    ``(A) may be converted into a percentage 
                (determined at the time of payment) of the qualified 
                higher education expenses of the designated beneficiary 
                at a participating eligible educational institution, or
                    ``(B) will be refunded in the case of the death or 
                disability of the beneficiary or if the beneficiary 
                does not enroll at such an institution.''
    (b) Conforming Amendment.--The table of parts for subchapter F of 
chapter 1 is amended by adding at the end the following new item:

                              ``Part VIII. State prepaid tuition 
                                        plans.''

            TITLE II--SCHOLARSHIPS FOR ACADEMIC ACHIEVEMENT

SEC. 201. ACADEMIC ACHIEVEMENT SCHOLARSHIPS.

    (a) Scholarships.--The Secretary of Education is authorized to 
award scholarships for academic year 1997-1998 and succeeding academic 
years to each student in a State who graduated in the top 5 percent of 
such student's graduating class from secondary school in academic year 
1996-1997 or a succeeding academic year.
    (b) Amount.--Each scholarship awarded under this section shall be 
in the amount of $1,000.
    (c) Number and Use.--Each student described in subsection (a) may 
receive a maximum of 2 scholarships under this section for use at any 
institution of higher education during any 4 academic years.
    (d) Continuing Eligibility.--In order to be eligible to receive a 
second scholarship under this section, a student shall maintain a 3.0 
grade point average on a 4.0 grade point scale during such student's 
first year of study at an institution of higher education.
    (e) Limitation Based on Modified Adjusted Gross Income.--
            (1) In general.--The Secretary of Education shall not award 
        a scholarship to a student under this section if the modified 
        adjusted gross income of the parents of such student in the 
        case of a dependent student, or the student in the case of an 
        independent student, for the most recent taxable year ending 
        before the academic year for which the scholarship is awarded 
        exceeds $70,000 ($100,000 in the case of a joint return).
            (2) Modified adjusted gross income.--The term ``modified 
        adjusted gross income'' means the adjusted gross income of the 
        taxpayer for the taxable year determined without regard to 
        sections 911, 931, and 933 of the Internal Revenue Code of 
        1986.
            (3) Adjustment of dollar amount limitations for 
        inflation.--
                    (A) In general.--In the case of any calendar year 
                after 1996, the $70,000 and $100,000 amounts under 
                paragraph (1), shall each be increased by an amount 
                equal to--
                            (i) such dollar amount, multiplied by
                            (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) of the 
                        Internal Revenue Code of 1986 for such calendar 
                        year by substituting ``calendar year 1995'' for 
                        ``calendar year 1992'' in subparagraph (B) of 
                        such section.
                    (B) Rounding.--The rounding rules of section 
                220(b)(3)(C) of the Internal Revenue Code of 1986 shall 
                apply to any increase under subparagraph (A).
    (f) Regulations.--The Secretary of Education shall promulgate 
regulations regarding the notification concerning, payment of, and 
continuing eligibility for, scholarships under this section.

SEC. 202. DEFINITIONS.

    For the purpose of this title--
            (1) the term ``institution of higher education'' has the 
        meaning given such term in section 1201 of the Higher Education 
        Act of 1965 (20 U.S.C. 1141);
            (2) the term ``secondary school'' has the meaning given 
        such term in section 14101 of the Elementary and Secondary 
        Education Act of 1965 (20 U.S.C. 8801); and
            (3) the term ``State'' means each of the several States of 
        the United States and the District of Columbia.

SEC. 203. AUTHORIZATION OF APPROPRIATIONS.

    There are authorized to be appropriated $130,000,000 for fiscal 
year 1997 and $260,000,000 for each of the 4 succeeding fiscal years.

                     TITLE III--DEFICIT NEUTRALITY

SEC. 301. SENSE OF THE SENATE.

    It is the sense of the Senate that--
            (1) this Act will not increase the budget deficit of the 
        United States; and
            (2) the costs of carrying out this Act should be paid by 
        closing corporate tax loopholes.
                                 <all>