[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1233 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1233

  To amend the Internal Revenue Code of 1986 to provide tax relief to 
middle income families who are struggling to pay for college, to amend 
  the Higher Education Act of 1965 to provide significantly increased 
     financial aid for needy students, provide universal access to 
  postsecondary education, reduce student loan costs while improving 
student loan benefits, to streamline the Federal Family Education Loan 
                    Program, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 8, 1997

 Mr. Clay  (for himself and Mr. Rangel) introduced the following bill; 
which was referred to the Committee on Education and the Workforce, and 
  in addition to the Committee on Ways and Means, for a period to be 
subsequently determined by the Speaker, in each case for consideration 
  of such provisions as fall within the jurisdiction of the committee 
                               concerned

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to provide tax relief to 
middle income families who are struggling to pay for college, to amend 
  the Higher Education Act of 1965 to provide significantly increased 
     financial aid for needy students, provide universal access to 
  postsecondary education, reduce student loan costs while improving 
student loan benefits, to streamline the Federal Family Education Loan 
                    Program, 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 ``Hope and Opportunity for 
Postsecondary Education Act of 1997''.

                        TITLE I--TAX PROVISIONS

SEC. 101. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This title may be cited as the ``Higher Education 
Tax Incentive Act of 1997''.
    (b) 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.

SEC. 102. CREDIT FOR HIGHER EDUCATION EXPENSES.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits) is amended by inserting 
after section 23 the following new section:

``SEC. 24. HIGHER EDUCATION TUITION AND FEES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year the amount of qualified higher education expenses 
paid by the taxpayer during such taxable year for education furnished 
during any academic period beginning in such year.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--
                    ``(A) In general.--The amount allowed as a credit 
                under subsection (a) for any taxable year with respect 
                to the qualified higher education expenses of any 1 
                individual shall not exceed $1,500.
                    ``(B) Reduction for other nontaxable federal 
                assistance.--
                            ``(i) In general.--If any nontaxable 
                        Federal assistance is allocable to any academic 
                        period, the dollar amount applicable under 
                        subparagraph (A) for the taxable year in which 
                        such period begins shall be reduced by the 
                        amount of such assistance.
                            ``(ii) Nontaxable federal assistance.--For 
                        purposes of clause (i), the term `nontaxable 
                        Federal assistance' means any scholarship or 
                        grant provided by the Federal Government which 
                        is exempt from tax under this chapter by reason 
                        of section 117 or any other Federal law. Such 
                        term shall not include any benefit described in 
                        section 480(c)(2) of the Higher Education Act 
                        of 1965 (20 U.S.C. 1087vv(c)(2)), as in effect 
                        on the date of enactment of this section.
            ``(2) Credit allowed for only 2 taxable years.--No credit 
        shall be allowed under subsection (a) for a taxable year with 
        respect to the qualified higher education expenses of an 
        individual unless the taxpayer elects to have this section 
        apply with respect to such individual for such year. An 
        election under this paragraph shall not take effect with 
        respect to an individual for any taxable year if an election 
        under this paragraph (by the taxpayer or any other individual) 
        is in effect with respect to such individual for any 2 prior 
        taxable years.
            ``(3) Credit allowed for year only if individual is at 
        least \1/2\ time student for portion of year.--No credit shall 
        be allowed under subsection (a) for a taxable year with respect 
        to the qualified higher education expenses of an individual 
        unless such individual is an eligible student for at least one 
        academic period which begins during such year.
            ``(4) Credit allowed only for first 2 years of 
        postsecondary education.--No credit shall be allowed under 
        subsection (a) for a taxable year with respect to the qualified 
        higher education expenses of an individual if the individual 
has completed (before the beginning of such taxable year) the first 2 
years of postsecondary education at an institution of higher education.
    ``(c) Limitation Based on Modified Adjusted Gross Income.--
            ``(1) In general.--The amount which would (but for this 
        subsection) be taken into account under subsection (a) for the 
        taxable year shall be reduced (but not below zero) by the 
        amount determined under paragraph (2).
            ``(2) Amount of reduction.--The amount determined under 
        this paragraph is the amount which bears the same ratio to the 
        amount which would be so taken into account as--
                    ``(A) the excess of--
                            ``(i) the taxpayer's modified adjusted 
                        gross income for such taxable year, over
                            ``(ii) $50,000 ($80,000 in the case of a 
                        joint return), bears to
                    ``(B) $20,000.
            ``(3) Modified adjusted gross income.--The term `modified 
        adjusted gross income' means the adjusted gross income of the 
        taxpayer for the taxable year--
                    ``(A) determined without regard to section 221, and
                    ``(B) increased by any amount excluded from gross 
                income under section 911, 931, or 933.
    ``(d) Definitions.--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,
                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 course or other 
                education is part of the individual's degree program.
                    ``(C) Exception for nonacademic fees.--Such term 
                does not include student activity fees, athletic fees, 
                insurance expenses, or other expenses unrelated to an 
                individual's academic course of instruction.
            ``(2) Institution of higher education.--The term 
        `institution of higher education' means an institution--
                    ``(A) which is described in section 481 of the 
                Higher Education Act of 1965 (20 U.S.C. 1088), as in 
                effect on the date of the enactment of this section, 
                and
                    ``(B) which is eligible to participate in a program 
                under title IV of such Act.
            ``(3) Eligible student.--The term `eligible student' means, 
        with respect to any academic period, a student who--
                    ``(A) meets the requirements of section 484(a)(1) 
                of the Higher Education Act of 1965 (20 U.S.C. 
                1091(a)(1)), as in effect on the date of the enactment 
                of this section, and
                    ``(B) is carrying at least \1/2\ the normal full-
                time work load for the course of study the student is 
                pursuing.
            ``(4) Other terms relating to the higher education act.--
        The following terms shall have the meanings prescribed in 
        regulations under section 481(g) of the Higher Education Act of 
        1965 (20 U.S.C. 1088(g)), as added by the Student Financial Aid 
        Improvements Act of 1997:
                    ``(A) Academic period.
                    ``(B) Normal full-time workload.
                    ``(C) First 2 years of postsecondary education.
                    ``(D) Qualifying grade point average.
                    ``(E) Job skills and new job skills.
    ``(e) Treatment of Expenses Paid by Dependent.--If a deduction 
under section 151 with respect to an individual is allowed to another 
taxpayer for a taxable year beginning in the calendar year in which 
such individual's taxable year begins--
            ``(1) no credit shall be allowed under subsection (a) to 
        such individual for such individual's taxable year, and
            ``(2) qualified higher education expenses paid by such 
        individual during such individual's taxable year shall be 
        treated for purposes of this section as paid by such other 
        taxpayer.
    ``(f) Treatment of Certain Prepayments.--If qualified higher 
education expenses are paid by the taxpayer during a taxable year for 
an academic period which begins during the first 3 months following 
such taxable year, such academic period shall be treated for purposes 
of this section as beginning during such taxable year.
    ``(g) Special Rules.--
            ``(1) Denial of credit if individual convicted of drug 
        offense.--No credit shall be allowed under subsection (a) with 
        respect to the qualified higher education expenses of an 
        individual for any taxable year if the individual has been 
        convicted before the end of such year of a Federal or State 
        felony offense consisting of the possession or distribution of 
        a controlled substance.
            ``(2) Denial of credit if individual fails to satisfy grade 
        point average requirement.--If an election was in effect under 
        this section with respect to the qualified higher education 
        expenses of an individual for any taxable year, no credit shall 
        be allowed under subsection (a) with respect to qualified 
        higher education expenses of such individual for a succeeding 
        taxable year if the individual does not have a qualifying grade 
        point average for all courses at an institution of higher 
        education for academic periods ending before the beginning of 
        such succeeding taxable year. Such average shall be determined 
        without regard to--
                    ``(A) courses taken while attending high school, 
                and
                    ``(B) courses referred to in subsection (d)(1)(B).
            ``(3) No double benefit.--No credit shall be allowed under 
        subsection (a) for any taxable year for any expense--
                    ``(A) with respect to an individual if a deduction 
                is allowed under section 221 for the taxable year for 
                any expense with respect to such individual, or
                    ``(B) for which a deduction is allowed under any 
                other provision of this chapter.
            ``(4) Identification requirement.--No credit shall be 
        allowed under subsection (a) to a taxpayer with respect to the 
        qualified higher education expenses of an individual unless the 
        taxpayer includes the name and taxpayer identification number 
        of such individual on the return of tax for the taxable year.
            ``(5) Adjustment for certain scholarships.--The amount of 
        qualified higher education expenses otherwise taken into 
        account under subsection (a) with respect to an individual for 
        an academic period shall be reduced (before the application of 
        subsections (b) and (c)) by the sum of--
                    ``(A) any amounts paid for the benefit of such 
                individual which are allocable to such period as--
                            ``(i) a qualified scholarship which is 
                        excludable from gross income under section 117,
                            ``(ii) an educational assistance allowance 
                        under chapter 30, 31, 32, 34, or 35 of title 
                        38, United States Code, or under chapter 1606 
                        of title 10, United States Code,
                            ``(iii) a payment which is excludable from 
                        gross income under section 127, or
                            ``(iv) a payment (other than a gift, 
                        bequest, devise, or inheritance within the 
                        meaning of section 102(a)) for such 
                        individual's educational expenses, or 
                        attributable to such individual's enrollment at 
                        an institution of higher education, which is 
                        excludable from gross income under any law of 
                        the United States, and
                    ``(B) the amount excludable from gross income under 
                section 135 which is allocable to such expenses with 
                respect to such individual for such period.
            ``(6) No credit 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 the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(7) Nonresident aliens.--If the taxpayer is a nonresident 
        alien individual for any portion of the taxable year, this 
        section shall apply only if such individual is treated as a 
        resident alien of the United States for purposes of this 
        chapter by reason of an election under subsection (g) or (h) of 
        section 6013.
    ``(h) Inflation Adjustments.--
            ``(1) Dollar limitation on amount of credit.--
                    ``(A) In general.--In the case of a taxable year 
                beginning after 1997, the $1,500 amount in subsection 
                (b)(1)(A) shall 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 the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 1996' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--If any amount as adjusted under 
                subparagraph (A) is not a multiple of $50, such amount 
                shall be rounded to the next lowest multiple of $50.
            ``(2) Income limits.--
                    ``(A) In general.--In the case of a taxable year 
                beginning after 2000, the $50,000 and $80,000 amounts 
                in subsection (c)(2) and section 221(b)(2)(B)(i)(II) 
                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 the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 1999' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--If any amount as adjusted under 
                subparagraph (A) is not a multiple of $5,000, such 
                amount shall be rounded to the next lowest multiple of 
                $5,000.
    ``(i) Regulations.--The Secretary may prescribe such regulations as 
may be necessary or appropriate to carry out this section, including 
regulations providing for a recapture of credit allowed under this 
section in cases where there is a refund in a subsequent taxable year 
of any amount which was taken into account in determining the amount of 
such credit.''
    (b) Extension of Procedures Applicable to Mathematical or Clerical 
Errors.--Paragraph (2) of section 6213(g) (relating to the definition 
of mathematical or clerical errors) is amended by striking ``and'' at 
the end of subparagraph (G), by striking the period at the end of 
subparagraph (H) and inserting ``, and'', and by inserting after 
subparagraph (H) the following new subparagraph:
                    ``(I) an omission of a correct TIN required under 
                section 24(g)(4) or under section 221(d)(2)(A) 
                (relating to higher education tuition and fees) to be 
                included on a return.''
    (c) Returns Relating to Higher Education Expenses.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 (relating to information concerning transactions 
        with other persons) is amended by inserting after section 6050R 
        the following new section:

``SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION EXPENSES.

    ``(a) In General.--Any person--
            ``(1) which is an institution of higher education which 
        receives payments for qualified higher education expenses with 
        respect to any individual for any calendar year, or
            ``(2) which is engaged in a trade or business which, in the 
        course of such trade or business makes payments during any 
        calendar year to any individual which constitute reimbursements 
        or refunds (or similar amounts) of qualified higher education 
        expenses of such individual,
shall make the return described in subsection (b) with respect to the 
individual at such time as the Secretary may by regulations prescribe.
    ``(b) Form and Manner of Returns.--A return is described in this 
subsection if such return--
            ``(1) is in such form as the Secretary may prescribe,
            ``(2) contains--
                    ``(A) the name, address, and TIN of the individual 
                with respect to whom payments described in subsection 
                (a) were received from (or were paid to),
                    ``(B) the name, address, and TIN of any individual 
                certified by the individual described in subparagraph 
                (A) as the taxpayer who will claim the individual as a 
                dependent for purposes of the deduction allowable under 
                section 151 for any taxable year ending with or within 
                the calendar year,
                    ``(C) the--
                            ``(i) aggregate amount of payments for 
                        qualified higher education expenses received 
                        with respect to the individual described in 
                        subparagraph (A) during the calendar year, and
                            ``(ii) aggregate amount of reimbursements 
                        or refunds (or similar amounts) paid to such 
                        individual during the calendar year,
                    ``(D) the aggregate amount of nontaxable Federal 
                assistance received with respect to the individual 
                described in subparagraph (A) during the calendar year, 
                and
                    ``(E) such other information as the Secretary may 
                prescribe.
    ``(c) Application to Governmental Units.--For purposes of this 
section--
            ``(1) a governmental unit or any agency or instrumentality 
        thereof shall be treated as a person, and
            ``(2) any return required under subsection (a) by such 
        governmental entity shall be made by the officer or employee 
        appropriately designated for the purpose of making such return.
    ``(d) Statements To Be Furnished to Individuals With Respect to 
Whom Information Is Required.--Every person required to make a return 
under subsection (a) shall furnish to each individual whose name is 
required to be set forth in such return under subparagraph (A) or (B) 
of subsection (b)(2) a written statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return, 
        and
            ``(2) the aggregate amounts described in subparagraphs (C) 
        and (D) of subsection (b)(2).
The written statement required under the preceding sentence shall be 
furnished on or before January 31 of the year following the calendar 
year for which the return under subsection (a) was required to be made.
    ``(e) Definitions.--For purposes of this section, the terms 
`institution of higher education', `qualified higher education 
expenses', and `nontaxable Federal assistance' have the meanings given 
such terms by section 24.
    ``(f) Returns Which Would Be Required To Be Made by 2 or More 
Persons.--Except to the extent provided in regulations prescribed by 
the Secretary, in the case of any amount received by any person on 
behalf of another person, only the person first receiving such amount 
shall be required to make the return under subsection (a).
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the provisions of this section. No 
penalties shall be imposed under section 6724 with respect to any 
return or statement required under this section until such time as such 
regulations are issued.''
            (2) Assessable penalties.--Section 6724(d) (relating to 
        definitions) is amended--
                    (A) by redesignating clauses (x) through (xv) as 
                clauses (xi) through (xvi), respectively, in paragraph 
                (1)(B) and by inserting after clause (ix) of such 
                paragraph the following new clause:
                            ``(x) section 6050S (relating to returns 
                        relating to payments for qualified higher 
                        education expenses),'', and
                    (B) by striking ``or'' at the end of the next to 
                last subparagraph, by striking the period at the end of 
                the last subparagraph and inserting ``, or'', and by 
                adding at the end the following new subparagraph:
                    ``(Z) section 6050S(d) (relating to returns 
                relating to qualified higher education expenses).''
            (3) Clerical amendment.--The table of sections for subpart 
        B of part III of subchapter A of chapter 61 is amended by 
        inserting after the item relating to section 6050R the 
        following new item:

                              ``Sec. 6050S. Returns relating to higher 
                                        education expenses.''
    (d) Clerical Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 is amended by inserting after the 
item relating to section 23 the following new item:

                              ``Sec. 24. Higher education tuition and 
                                        fees.''
    (e) Effective Date; Sunset.--
            (1) Purpose.--The President's budget produces balance in 
        fiscal year 2002 under Office of Management and Budget 
        assumptions, including the permanent changes in law providing 
        the tax reduction set forth in the preceding portions of this 
        section. The President's budget also includes a mechanism to 
        guarantee balance under Congressional Budget Office 
        assumptions. As a part of that mechanism, the following 
        provision sunsetting the tax reduction is included, as well as 
        specific expedited procedures for reinstatement of the 
        reduction to the extent that Office of Management and Budget 
        assumptions prove correct.
            (2) Effective date.--The amendments made by this section 
        shall apply to expenses paid after December 31, 1996 (in 
        taxable years ending after such date), for education furnished 
        in academic periods beginning after June 30, 1997, except that 
        no credit shall be allowed under section 24 of the Internal 
        Revenue Code of 1986 for taxable years beginning after December 
        31, 2000.

SEC. 103. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

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

``SEC. 221. HIGHER EDUCATION TUITION AND FEES.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction the amount of qualified higher 
education expenses paid by the taxpayer during the taxable year for 
education furnished to the taxpayer, the taxpayer's spouse, or 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 during any academic period beginning in such year.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--
                    ``(A) In general.--The amount allowed as a 
                deduction under subsection (a) for any taxable year 
                shall not exceed $10,000.
                    ``(B) Phase-in.--In the case of taxable years 
                beginning in 1997 or 1998, subparagraph (A) shall be 
                applied by substituting `$5,000' for `$10,000'.
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--The amount which would (but for 
                this paragraph) be allowed as a deduction under 
                subsection (a) shall be reduced (but not below zero) by 
                the amount determined under subparagraph (B).
                    ``(B) Amount of reduction.--The amount determined 
                under this subparagraph equals the amount which bears 
                the same ratio to the deduction (determined without 
                regard to this paragraph) as--
                            ``(i) the excess of--
                                    ``(I) the taxpayer's modified 
                                adjusted gross income for the taxable 
                                year, over
                                    ``(II) $50,000 ($80,000 in the case 
                                of a joint return), bears to
                            ``(ii) $20,000.
                    ``(C) Modified adjusted gross income.--For purposes 
                of subparagraph (B), 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, and 469.
                For purposes of sections 86, 135, 219, and 469, 
                adjusted gross income shall be determined without 
                regard to the deduction allowed under this section.
                    ``(D) Cross reference.--

                                ``For inflation adjustment of $50,000 
and $80,000 amounts, see section 24(h).
    ``(c) Definitions.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph (2), 
        terms used in this section which are also used in section 24 
        have the respective meanings given such terms in section 24.
            ``(2) Deduction available for education to acquire or 
        improve job skills.--For purposes of applying this section, the 
        requirement of section 24(d)(3) shall be treated as met if--
                    ``(A) the individual is enrolled in a course which 
                enables the individual to improve the individual's job 
                skills or to acquire new job skills, and
                    ``(B) the individual is not enrolled in an 
                elementary or secondary school.
    ``(d) Special Rules.--
            ``(1) Denial of double benefit.--No deduction shall be 
        allowed under subsection (a) for any expense for which a 
        deduction is allowed to the taxpayer under any other provision 
        of this chapter.
            ``(2) Certain rules to apply.--Rules similar to the rules 
        of subsections (e) and (f) of section 24, and the following 
        rules of section 24(g), shall apply for purposes of this 
        section:
                    ``(A) Paragraph (4) (relating to identification 
                requirement).
                    ``(B) Paragraph (5) (relating to adjustment for 
                certain scholarships).
                    ``(C) Paragraph (6) (relating to no benefit for 
                married individuals filing separate returns).
                    ``(D) Paragraph (7) (relating to nonresident 
                aliens).
            ``(3) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out 
        this section.''
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) is amended by inserting after paragraph (16) the following new 
paragraph:
            ``(17) Higher education tuition and fees.--The deduction 
        allowed by section 221.''
    (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 221 and inserting:

                              ``Sec. 221. Higher education tuition and 
                                        fees.
                              ``Sec. 222. Cross reference.''
    (d) Effective Date; Sunset.--
            (1) Purpose.--The President's budget produces balance in 
        fiscal year 2002 under Office of Management and Budget 
assumptions, including the permanent changes in law providing the tax 
reduction set forth in the preceding portions of this section. The 
President's budget also includes a mechanism to guarantee balance under 
Congressional Budget Office assumptions. As a part of that mechanism, 
the following provision sunsetting the tax reduction is included, as 
well as specific expedited procedures for reinstatement of the 
reduction to the extent that Office of Management and Budget 
assumptions prove correct.
            (2) Effective date.--The amendments made by this section 
        shall apply to expenses paid after December 31, 1996 (in 
        taxable years ending after such date), for education furnished 
        in academic periods beginning after June 30, 1997, except that 
        no deduction shall be allowed under section 221 of the Internal 
        Revenue Code of 1986 for taxable years beginning after December 
        31, 2000.

SEC. 104. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

    (a) Certain Direct Student Loans the Repayment of Which Is Income 
Contingent.--Paragraph (1) of section 108(f) is amended by striking 
``any student loan if'' and all that follows and inserting ``any 
student loan if--
                    ``(A) such discharge was pursuant to a provision of 
                such loan under which all or part of the indebtedness 
                of the individual would be discharged if the individual 
                worked for a certain period of time in certain 
                professions for any of a broad class of employers, or
                    ``(B) in the case of a loan made under part D of 
                title IV of the Higher Education Act of 1965 which has 
                a repayment schedule established under section 
                455(e)(4) of such Act (relating to income contingent 
                repayments), such discharge is after the maximum 
                repayment period under such loan (as prescribed under 
                such part).''
    (b) Certain Loans by Exempt Organizations.--
            (1) In general.--Paragraph (2) of section 108(f) (defining 
        student loan) is amended by striking ``or'' at the end of 
        subparagraphs (B) and (C) and by striking subparagraph (D) and 
        inserting the following:
                    ``(D) any organization described in section 
                501(c)(3) and exempt from tax under section 501(a), or
                    ``(E) any educational organization described in 
                section 170(b)(1)(A)(ii) pursuant to an agreement with 
                any entity described in subparagraph (A), (B), (C), or 
                (D) under which the funds from which the loan was made 
                were provided to such educational organization.
        The term `student loan' includes any loan made by an 
        organization described in subparagraph (D) to refinance a loan 
        meeting the requirements of the preceding sentence.''
            (2) Exception for discharges on account of services 
        performed for certain lenders.--Subsection (f) of section 108 
        is amended by adding at the end the following new paragraph:
            ``(3) Exception for discharges on account of services 
        performed for certain lenders.--Paragraph (1) shall not apply 
        to the discharge of a loan made by an organization described in 
        paragraph (2)(D) (or by an organization described in paragraph 
        (2)(E) from funds provided by an organization described in 
        paragraph (2)(D)) if the discharge is on account of services 
        performed for either such organization.''
    (c) Effective Date.--The amendments made by this section shall 
apply to discharges of indebtedness after the date of the enactment of 
this Act.

SEC. 105. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) Extension.--Subsection (d) of section 127 (relating to 
exclusion for educational assistance programs) is amended to read as 
follows:
    ``(d) Termination.--This section shall not apply to taxable years 
beginning after December 31, 2000.''
    (b) Repeal of Limitation on Graduate Education.--The last sentence 
of section 127(c)(1) is amended by striking ``, and such term also does 
not include any payment for, or the provision of any benefits with 
respect to, any graduate level course of a kind normally taken by an 
individual pursuing a program leading to a law, business, medical, or 
other advanced academic or professional degree''.
    (c) Effective Dates.--
            (1) Extension.--The amendments made by subsection (a) shall 
        apply to taxable years beginning after December 31, 1996.
            (2) Graduate education.--The amendment made by subsection 
        (b) shall apply with respect to expenses relating to courses 
beginning after June 30, 1996.
            (3) Expedited procedures.--The Secretary of the Treasury 
        shall establish expedited procedures for the refund of any 
        overpayment of taxes imposed by the Internal Revenue Code of 
        1986 which is attributable to amounts excluded from gross 
        income during 1996 or 1997 under section 127 of such Code, 
        including procedures waiving the requirement that an employer 
        obtain an employee's signature where the employer demonstrates 
        to the satisfaction of the Secretary that any refund collected 
        by the employer on behalf of the employee will be paid to the 
        employee.

SEC. 106. SMALL BUSINESS EDUCATIONAL ASSISTANCE CREDIT.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits) is amended by adding at the end 
the following new section:

``SEC. 45D. SMALL BUSINESS EDUCATIONAL ASSISTANCE CREDIT.

    ``(a) General Rule.--For purposes of section 38, the small business 
educational assistance credit for any taxable year is an amount equal 
to 10 percent of the qualified educational assistance expenses of the 
taxpayer for the taxable year.
    ``(b) Qualified Educational Assistance Expenses.--For purposes of 
this section--
            ``(1) In general.--The term `qualified educational 
        assistance expenses' means any amount paid or incurred by an 
        eligible small employer for educational assistance furnished to 
        an employee of the employer by a person other than such 
        employer (or an employee of such employer) under an educational 
        assistance program described in section 127(b).
            ``(2) Educational assistance.--The term `educational 
        assistance' has the meaning given such term by section 
        127(c)(1) (determined without regard to subparagraph (B) 
        thereof).
            ``(3) Limitations.--
                    ``(A) Dollar limitation per employee.--The 
                aggregate amount which may be taken into account under 
                paragraph (1) with respect to any employee for any 
                taxable year shall not exceed $5,250.
                    ``(B) Payments to related persons.--
                            ``(i) In general.--No amount shall be taken 
                        into account under paragraph (1) if such amount 
                        is to be paid to a related person with respect 
                        to the employer.
                            ``(ii) Related person.--For purposes of 
                        this subparagraph, a person shall be related to 
                        the employer if--
                                    ``(I) such person is a 5-percent 
                                owner (within the meaning of section 
                                416(i)(1)(B)(i)) of the employer, or
                                    ``(II) such person bears a 
                                relationship to the employer or such a 
                                5-percent owner which is described in 
                                section 267(b) or 707(b)(1).
                    ``(C) Trade or business.--No amount shall be taken 
                into account under paragraph (1) unless it is incurred 
                in the active conduct of a trade or business by the 
                taxpayer.
    ``(c) Eligible Small Employer.--For purposes of this section--
            ``(1) In general.--A taxpayer shall be treated as an 
        eligible small employer for any taxable year if the average 
        annual gross receipts of the taxpayer for the 3-taxable year 
        period ending with the preceding taxable year are $10,000,000 
        or less.
            ``(2) Special rules.--Section 448(c)(3) shall apply for 
        purposes of this subsection.
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Definitions.--The terms `employee' and `employer' 
        have the meanings given such terms by paragraphs (2) and (3) of 
        section 127(c), respectively.
            ``(2) Aggregation.--
                    ``(A) In general.--All persons treated as a single 
                employer under subsection (a) or (b) of section 52 or 
                subsection (m) or (o) of section 414 shall be treated 
                as a single employer.
                    ``(B) Allocation of credit.--The credit (if any) 
                determined under this section with respect to each 
                person described in subparagraph (A) shall be its 
                proportionate share of the qualified educational 
                assistance expenses giving rise to such credit.
            ``(3) Short taxable years.--For any taxable year having 
        less than 12 months, the credit determined under this section 
        shall be multiplied by a fraction, the numerator of which is 
        the number of days in the taxable year and the denominator of 
        which is 365.
            ``(4) Disallowance of deduction.--

                                ``For disallowance of deduction for 
expenses for which credit allowable, see section 280C(d).
    ``(e) Termination.--This section shall not apply to qualified 
educational assistance expenses incurred in taxable years beginning 
after December 31, 2000.''
    (b) Disallowance of Deductions.--Section 280C (relating to certain 
expenses for which credits are allowable) is amended by adding at the 
end the following new subsection:
    ``(d) Credit for Small Business Educational Assistance Expenses.--
            ``(1) In general.--No deduction shall be allowed for that 
        portion of the qualified educational assistance expenses (as 
        defined in section 45D(b)) otherwise allowable as a deduction 
        for the taxable year which is equal to the amount of the credit 
        determined for such taxable year under section 45D.
            ``(2) Election of reduced credit.--
                    ``(A) In general.--In the case of any taxable year 
                for which an election is made under this paragraph--
                            ``(i) paragraph (1) shall not apply, and
                            ``(ii) the amount of the credit under 
                        section 45D(a) shall be the amount determined 
                        under subparagraph (B).
                    ``(B) Amount of reduced credit.--The amount of the 
                credit determined under this subparagraph for any 
                taxable year shall be the amount equal to the excess 
                of--
                            ``(i) the amount of credit determined under 
                        section 45D(a) without regard to this 
                        paragraph, over
                            ``(ii) the product of--
                                    ``(I) the amount described in 
                                clause (i), and
                                    ``(II) the maximum rate of tax 
                                under section 11(b)(1).
                    ``(C) Election.--An election under this paragraph 
                for any taxable year shall be made not later than the 
                time for filing the return of tax for such year 
                (including extensions), shall be made on such return, 
                and shall be made in such manner as the Secretary may 
                prescribe. Such an election, once made, shall be 
                irrevocable.
            ``(3) Controlled groups.--Paragraph (3) of subsection (b) 
        shall apply for purposes of this subsection.''
    (c) General Business Credit.--Subsection (b) of section 38 
(relating to general business credit) is amended by striking ``plus'' 
at the end of paragraph (11), by striking the period at the end of 
paragraph (12) and inserting ``, plus'', and by adding at the end the 
following new paragraph:
            ``(13) the small business educational assistance credit 
        determined under section 45D(a).''
    (d) Conforming Amendments.--
            (1) No carryback.--Subsection (d) of section 39 (relating 
        to carryback and carryforward of unused credits) is amended by 
        adding at the end the following new paragraph:
            ``(8) No carryback of section 45d credit before 
        enactment.--No portion of the unused business credit for any 
        taxable year which is attributable to the credit determined 
        under section 45D may be carried back to a taxable year ending 
        before the date of the enactment of section 45D.''
            (2) The table of sections for subpart D of such part IV is 
        amended by adding at the end the following new item:

                              ``Sec. 45D. Small business educational 
                                        assistance credit.''
    (e) Effective Date.--The amendments made by this section shall 
apply to education and training furnished in taxable years beginning 
after December 31, 1997.

               TITLE II--STUDENT FINANCIAL AID PROVISIONS

SEC. 201. SHORT TITLE; REFERENCES.

    (a) Short Title.--This title may be cited as the ``Student 
Financial Aid Improvements Act of 1997''.
    (b) References.--References in this title to ``the Act'' shall 
refer to the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.).

                          PART A--PELL GRANTS

SEC. 211. PELL GRANT MAXIMUM AWARD.

    Section 401(b)(2)(A) of the Act is amended by adding at the end 
thereof the following: ``Except as otherwise provided in this section, 
in no case shall the maximum basic grant be less than $3,000.''.

                    PART B--STUDENT LOAN PROVISIONS

SEC. 221. MANAGEMENT AND RECOVERY OF RESERVES.

    Section 422 of the Act is amended--
            (1) by amending subsection (g)(1) to read as follows:
            ``(1) Authority to recover funds.--(A) Notwithstanding any 
        other provision of law, the reserve funds of the guaranty 
        agencies, and any assets purchased or developed with such 
        reserve funds, regardless of who holds or controls the reserves 
        or assets, shall remain the property of the United States.
            ``(B) The Secretary may direct the guaranty agency to 
        require the return, to the guaranty agency or to the Secretary, 
        of any reserve funds or assets held by, or under the control 
        of, any other entity, that the Secretary determines are 
        required--
                    ``(i) to pay the program expenses and contingent 
                liabilities of the guaranty agency;
                    ``(ii) to satisfy the guaranty agency's 
                requirements under subsection (h); or
                    ``(iii) for the orderly termination of the guaranty 
                agency's operations and the liquidation of its assets.
            ``(C) The Secretary may direct a guaranty agency, or such 
        agency's officers or directors, to cease any activity involving 
        expenditure, use, or transfer of the guaranty agency's reserve 
        funds or assets that the Secretary determines is a 
        misapplication, misuse, or improper expenditure of such funds 
        or assets.''; and
            (2) by adding after subsection (g) the following new 
        subsections:
    ``(h) Recall of Reserves in Fiscal Years 1997 Through 2002; 
Limitations on Use of Reserve Funds and Assets.--(1)(A) Notwithstanding 
any other provision of law, the Secretary shall, except as otherwise 
provided in this subsection, recall from the reserve funds held by 
guaranty agencies (which for purposes of this subsection shall include 
any reserve funds held by, or under the control of, any other entity) 
not less than--
            ``(i) $731,000,000 in fiscal year 1998;
            ``(ii) $127,000,000 in fiscal year 1999;
            ``(iii) $186,000,000 in each of the fiscal years 2000 and 
        2001; and
            ``(iv) $1,271,000,000 in fiscal year 2002.
    ``(B) Funds returned to the Secretary under this subsection shall 
be deposited in the Treasury.
    ``(C) The Secretary shall require each guaranty agency to return 
reserve funds under subparagraph (A) based on its proportionate share, 
as determined by the Secretary, of all reserve funds held by guaranty 
agencies as of September 30, 1996.
    ``(2)(A) Within 45 days of enactment of this subsection, all 
reserve funds held by a guaranty agency that have not yet been recalled 
by the Secretary under paragraph (1) shall be transferred by the 
guaranty agency to a restricted account (of a type specified by the 
Secretary) established by the guaranty agency, and be invested in 
United States Government securities specified by the Secretary. The 
manner and timeframe in which reserve funds so invested are recalled 
shall be specified by the Secretary, consistent with the requirements 
of this subsection. Except as described in subparagraph (B), the 
guaranty agency shall not use the reserve funds in such account, which 
shall include the earnings thereon, for any purpose without the express 
permission of the Secretary.
    ``(B)(i) In order to assist guaranty agencies in meeting program 
expenses, the Secretary shall permit the use of not more than an 
aggregate of $350,000,000 of the reserve funds held in the restricted 
accounts described in subparagraph (A) by guaranty agencies with 
agreements under section 428(c), as working capital to be used for such 
purposes as the Secretary may specify. The Secretary shall specify the 
amount of reserve funds in each guaranty agency's restricted account 
that may be used as working capital, based on the guaranty agency's 
proportionate share of all borrower accounts outstanding on September 
30, 1996. The guaranty agency shall repay such amount to its restricted 
account (or returned to the Treasury, if so directed by the Secretary) 
by no later than September 30, 2002, or the date on which such agency's 
agreement under section 428(c) ends (through resignation, expiration, 
or termination), whichever is earlier.
    ``(ii) The guaranty agency may use the earnings from its restricted 
account for fiscal year 1998 to assist in meeting its operational 
expenses for such year.
    ``(C) Nonliquid reserve fund assets, such as buildings and 
equipment purchased or developed by the guaranty agency with reserve 
funds, and any liquid assets remaining in a guaranty agency's 
restricted account after the recalls in paragraph (1)(A), shall--
            ``(i) remain the property of the United States;
            ``(ii) be used only for such purposes as the Secretary 
        determines are appropriate; and
            ``(iii) be subject to recall by the Secretary no later than 
        the date on which such agency's agreement under section 428(c) 
        ends (through resignation, expiration, or termination, as the 
        case may be).''.

SEC. 222. REPAYMENT TERMS.

    (a) Section 427 of the Act is amended--
            (1) in subsection (a)(2)--
                    (A) in subparagraph (B), in the matter preceding 
                clause (i), by striking ``over a period'' through ``nor 
                more than 10 years'' and inserting ``in accordance with 
                the repayment plan selected under subsection (d),'';
                    (B) in subparagraph (C), at the end of the 
                subparagraph, by striking out ``the 10-year period 
                described in subparagraph (B);'' and inserting the 
                following: ``the length of the repayment period under a 
                repayment plan described in subsection (d);'';
                    (C) by striking subparagraph (F);
                    (D) by redesignating subparagraphs (G), (H), and 
                (I) as subparagraphs (F), (G), and (H), respectively; 
                and
                    (E) in subparagraph (G) (as redesignated by 
                subparagraph (D)), by striking ``the option'' through 
                the end of the subparagraph and inserting ``the 
                repayment options described in subsection (d); and'';
            (2) in subsection (c), by striking ``in subsection 
        (a)(2)(H),'' and inserting the following: ``by a repayment plan 
        selected by the borrower under subparagraph (C) or (D) of 
        subsection (d)(1),''; and
            (3) by adding after subsection (c) the following new 
        subsection:
    ``(d) Repayment Plans.--
            ``(1) Design and selection.--In accordance with regulations 
        of the Secretary, the lender shall offer a borrower of a loan 
        made under this part the plans described in this subsection for 
        repayment of such loan, including principal and interest 
        thereon. No plan may require a borrower to repay a loan in less 
        than 5 years. The borrower may choose from--
                    ``(A) a standard repayment plan, with a fixed 
                annual repayment amount paid over a fixed period of 
                time, not to exceed 10 years;
                    ``(B) an extended repayment plan, with a fixed 
                annual repayment amount paid over an extended period of 
                time, not to exceed 30 years, except that the borrower 
                shall repay annually a minimum amount determined in 
                accordance with subsection (c);
                    ``(C) a graduated repayment plan, with annual 
                repayment amounts established at 2 or more graduated 
                levels and paid over an extended period of time, not to 
                exceed 30 years, except that the borrower's scheduled 
                payments shall not be less than 50 percent, nor more 
                than 150 percent, of what the amortized payment on the 
                amount owed would be if the loan were repaid under the 
                standard repayment plan; and
                    ``(D) an income-sensitive repayment plan, with 
                income-sensitive repayment amounts paid over a fixed 
                period of time, not to exceed 10 years.
            ``(2) Lender selection of option if borrower does not 
        select.--If a borrower of a loan made under this part does not 
        select a repayment plan described in paragraph (1), the lender 
        shall provide the borrower with a repayment plan described in 
        paragraph (1)(A).
            ``(3) Changes in selections.--The borrower of a loan made 
        under this part may change the borrower's selection of a 
        repayment plan under paragraph (1), or the lender's selection 
        of a plan for the borrower under paragraph (2), as the case may 
        be, under such conditions as may be prescribed by the Secretary 
        in regulation.
            ``(4) Acceleration permitted.--Under any of the plans 
        described in this subsection, the borrower shall be entitled to 
        accelerate, without penalty, repayment on the borrower's loans 
        under this part.''.
    (b) Section 428(b) of the Act is amended--
            (1) in paragraph (1)--
                    (A) in subparagraph (D), by striking clauses (i) 
                and (ii) and the clause designation ``(iii)'';
                    (B) in subparagraph (E)--
                            (i) in clause (i)--
                                    (I) by striking ``or section 
                                428A,'' and inserting ``or section 
                                428H,''; and
                                    (II) by striking ``the option'' 
                                through the end of the clause and 
                                inserting ``the repayment options 
                                described in paragraph (9); and''; and
                            (ii) in clause (ii)--
                                    (I) by striking ``over a period'' 
                                through ``nor more than 10 years'' and 
                                inserting ``in accordance with the 
                                repayment plan selected under paragraph 
                                (9), and''; and
                                    (II) by striking ``of this 
                                subsection;'' at the end of clause (ii) 
                                and inserting a semicolon; and
                    (C) in subparagraph (L)(i), by inserting after the 
                clause designation the following: ``except as otherwise 
                provided by a repayment plan selected by the borrower 
                under paragraph (9)(A) (iii) or (iv),''; and
            (2) by adding after paragraph (8) the following new 
        paragraph:
            ``(9) Repayment plans.--
                    ``(A) Design and selection.--In accordance with 
                regulations of the Secretary, the lender shall offer a 
                borrower of a loan made under this part the plans 
                described in this subparagraph for repayment of such 
                loan, including principal and interest thereon. No plan 
                may require a borrower to repay a loan in less than 5 
                years. The borrower may choose from--
                            ``(i) a standard repayment plan, with a 
                        fixed annual repayment amount paid over a fixed 
                        period of time, not to exceed 10 years;
                            ``(ii) an extended repayment plan, with a 
                        fixed annual repayment amount paid over an 
                        extended period of time, not to exceed 30 
                        years, except that the borrower shall repay 
                        annually a minimum amount determined in 
                        accordance with paragraph (2)(L);
                            ``(iii) a graduated repayment plan, with 
                        annual repayment amounts established at 2 or 
                        more graduated levels and paid over an extended 
                        period of time, not to exceed 30 years, except 
                        that the borrower's scheduled payments shall 
                        not be less than 50 percent, nor more than 150 
                        percent, of what the amortized payment on the 
                        amount owed would be if the loan were repaid 
                        under the standard repayment plan; and
                            ``(iv) an income-sensitive repayment plan, 
                        with income-sensitive repayment amounts paid 
                        over a fixed period of time, not to exceed 10 
                        years.
                    ``(B) Lender selection of option if borrower does 
                not select.--If a borrower of a loan made under this 
                part does not select a repayment plan described in 
                subparagraph (A), the lender shall provide the borrower 
                with a repayment plan described in subparagraph (A)(i).
                    ``(C) Changes in selections.--The borrower of a 
                loan made under this part may change the borrower's 
                selection of a repayment plan under subparagraph (A), 
                or the lender's selection of a plan for the borrower 
                under subparagraph (B), as the case may be, under such 
                conditions as may be prescribed by the Secretary in 
                regulation.
                    ``(D) Acceleration permitted.--Under any of the 
                plans described in this paragraph, the borrower shall 
                be entitled to accelerate, without penalty, repayment 
                on the borrower's loans under this part.
                    ``(E) Comparable ffel and direct loan repayment 
                plans.--The Secretary shall ensure that the repayment 
                plans offered to borrowers under this part are 
                comparable, to the extent practicable and not otherwise 
                provided in statute, to the repayment plans offered 
                under part D.''.
    (c) Section 428C of the Act is amended--
            (1) in subsection (b)(3)(F), by striking ``alternative''; 
        and
            (2) in subsection (c)--
                    (A) by amending paragraph (2) to read as follows:
            ``(2) Repayment plans.--
                    ``(A) Design and selection.--In accordance with 
                regulations of the Secretary, the lender shall offer a 
                borrower of a loan made under this section the plans 
                described in this paragraph for repayment of such loan, 
                including principal and interest thereon. No plan may 
                require a borrower to repay a loan in less than 5 
                years. The borrower may choose from--
                            ``(i) a standard repayment plan, with a 
                        fixed annual repayment amount paid over a fixed 
                        period of time, not to exceed 10 years;
                            ``(ii) an extended repayment plan, with a 
                        fixed annual repayment amount paid over an 
                        extended period of time, not to exceed 30 
                        years, except that the borrower shall repay 
                        annually a minimum amount determined in 
                        accordance with paragraph (3);
                            ``(iii) a graduated repayment plan, with 
                        annual repayment amounts established at 2 or 
                        more graduated levels and paid over an extended 
                        period of time, not to exceed 30 years, except 
                        that the borrower's scheduled payments shall 
                        not be less than 50 percent, nor more than 150 
                        percent, of what the amortized payment on the 
                        amount owed would be if the loan were repaid 
                        under the standard repayment plan; and
                            ``(iv) an income-sensitive repayment plan, 
                        with income-sensitive repayment amounts paid 
                        over a fixed period of time, not to exceed 10 
                        years.
                    ``(B) Lender selection of option if borrower does 
                not select.--If a borrower of a loan made under this 
                section does not select a repayment plan described in 
                subparagraph (A), the lender shall provide the borrower 
                with a repayment plan described in subparagraph (A)(i).
                    ``(C) Changes in selections.--The borrower of a 
                loan made under this section may change the borrower's 
                selection of a repayment plan under subparagraph (A), 
                or the lender's selection of a plan for the borrower 
                under subparagraph (B), as the case may be, under such 
                conditions as may be prescribed by the Secretary in 
                regulation.''.
    (d) Section 455(d) of the Act is amended--
            (1) in paragraph (1)--
                    (A) in subparagraph (B), by inserting after ``an 
                extended period of time,'' the following: ``not to 
                exceed 30 years,''; and
                    (B) in subparagraph (C), by striking ``a fixed or 
                extended period of time,'' and inserting the following: 
                ``an extended period of time, not to exceed 30 
                years,''; and
            (2) in paragraph (2), by striking ``subparagraph (A), (B), 
        or (C) of paragraph (1).'' and inserting ``paragraph (1)(A).''.

SEC. 223. INTEREST RATES.

    (a) Section 427A of the Act is amended--
            (1) in subsection (g)(2)--
                    (A) by inserting after the paragraph heading the 
                subparagraph designation ``(A)'';
                    (B) by redesignating subparagraphs (A) and (B) as 
                clauses (i) and (ii), respectively;
                    (C) by striking ``paragraph (1),'' and inserting 
                ``paragraph (1), and except as provided in subparagraph 
                (B),''; and
                    (D) by adding after subparagraph (A) (as 
                redesignated by subparagraph (A)) the following new 
                subparagraph:
            ``(B) In the case of loans made or insured under section 
        428 or 428H for which the first disbursement is made on or 
        after October 1, 1997, for purposes of paragraph (1), the rate 
        determined under this paragraph shall, during any 12-month 
        period beginning on July 1 and ending on June 30, be determined 
        on the preceding June 1 and be equal to the bond equivalent 
        rate of the securities with a comparable maturity, as 
        established by the Secretary, except that such rate shall not 
        exceed 8.25 percent.'';
            (2) in subsection (h)--
                    (A) in the heading thereof, by striking ``July 1, 
                1998.--'' and inserting ``October 1, 1997.--'';
                    (B) in paragraph (1)--
                            (i) by striking ``(f), and (g)'' and 
                        inserting ``and (f),''; and
                            (ii) by striking ``July 1, 1998,'' and 
                        inserting ``October 1, 1997,''; and
                    (C) in paragraph (2)--
                            (i) in the heading, by striking ``july 1, 
                        1998.--'' and inserting ``october 1, 1997.--''; 
                        and
                            (ii) by striking ``July 1, 1998,'' and 
                        inserting ``October 1, 1997,''; and
            (3) in subsection (i)(7)(B), by adding at the end the 
        following: ``Notwithstanding any other provision of law, the 
        interest rate determined under this subparagraph shall be used 
        solely to determine the rebate of excess interest required by 
        this paragraph and shall not be used to calculate or pay 
        special allowances under section 438.''.
    (b) Section 455(b) of the Act is amended--
            (1) in paragraph (2)(B)--
                    (A) by redesignating clauses (i) and (ii) as 
                subclauses (I) and (II), respectively;
                    (B) by inserting after the subparagraph heading the 
                clause designation ``(i)'';
                    (C) by striking ``subparagraph (A),'' and inserting 
                ``subparagraph (A) and except as provided in clause 
                (ii),''; and
                    (D) by adding after clause (i) (as redesignated by 
                subparagraph (B)) the following new clause:
            ``(ii) In the case of Federal Direct Stafford/Ford Loans or 
        Federal Direct Unsubsidized Stafford/Ford Loans for which the 
        first disbursement is made on or after October 1, 1997, for 
        purposes of subparagraph (A), the rate determined under this 
        subparagraph shall, during any 12-month period beginning on 
        July 1 and ending on June 30, be determined on the preceding 
        June 1 and be equal to the bond equivalent rate of the 
        securities with a comparable maturity, as established by the 
        Secretary, except that such rate shall not exceed 8.25 
        percent.'';
            (2) in paragraph (3)--
                    (A) by striking ``and (2),'' and inserting ``, and 
                except as provided in paragraph (2),''; and
                    (B) by striking ``made on or after July 1, 1998,'' 
                and inserting ``for which the first disbursement is 
                made on or after October 1, 1997,''; and
            (3) in paragraph (4)(B), by striking ``July 1, 1998,'' and 
        inserting ``October 1, 1997,''.

SEC. 224. LENDER AND HOLDER RISK SHARING.

    Section 428(b)(1)(G) of the Act is amended by striking ``not less 
than 98 percent'' and inserting ``95 percent''.

SEC. 225. FEES AND INSURANCE PREMIUMS.

    (a) Section 428(b)(1)(H) of the Act is amended--
            (1) by inserting the clause designation ``(i)'' following 
        the subparagraph designation;
            (2) by striking ``the loan,'' and inserting ``any loan made 
        under section 428 or 428B before July 1, 1998,''; and
            (3) after clause (i) (as redesignated by paragraph (1)), by 
        adding ``and'' and the following new clause:
                    ``(ii) provides that no insurance premiums shall be 
                charged to the borrower of any loan made under section 
                428 or 428B on or after July 1, 1998;''.
    (b) Section 428H(h) of the Act is amended--
            (1) by inserting the paragraph designation ``(1)'' 
        following the subsection heading;
            (2) by striking ``under this section'' and inserting ``of a 
        loan made under this section made before July 1, 1998''; and
            (3) by adding at the end of paragraph (1) (as redesignated 
        by paragraph (1)) the following new paragraph:
            ``(2) No insurance premium may be charged to the borrower 
        on any loan made under this section made on or after July 1, 
        1998.''.
    (c) Section 438(c) of the Act is amended--
            (1) in paragraph (2), by striking ``paragraph (6)'' and 
        inserting ``paragraphs (6) and (8)''; and
            (2) by adding after paragraph (7) the following new 
        paragraph:
            ``(8) Origination fee on subsidized loans on or after july 
        1, 1998.--In the case of any loan made or insured under section 
        428 on or after July 1, 1998, paragraph (2) shall be applied by 
        substituting `2.0 percent' for `3.0 percent'.''.
    (d) Section 455(c) of the Act is amended--
            (1) by striking ``The Secretary'' and inserting ``(1) For 
        loans made under this part before July 1, 1998, the 
        Secretary'';
            (2) by striking ``of a loan made under this part''; and
            (3) by adding at the end thereof the following new 
        paragraph:
    ``(2) For loans made under this part on or after July 1, 1998, the 
Secretary shall charge the borrower an origination fee of--
            ``(A) 2.0 percent of the principal amount of the loan, in 
        the case of Federal Direct Stafford/Ford Loans; or
            ``(B) 3.0 percent of the principal amount of the loan, in 
        the case of Federal Direct Unsubsidized Stafford/Ford Loans or 
        Federal Direct PLUS Loans.''.

SEC. 226. FUNCTIONS OF GUARANTY AGENCIES.

    (a) Section 428 of the Act is further amended--
            (1) in subsection (a)--
                    (A) in paragraph (1)(B)--
                            (i) in the matter preceding clause (i), by 
                        striking ``which is insured'' and inserting 
                        ``which, before October 1, 1997, is''; and
                            (ii) in clause (ii), by inserting ``as in 
                        effect the day before the day of enactment of 
                        this section,'' after ``subsection (b),''; and
                    (B) in paragraph (3)--
                            (i) by striking subparagraph (B); and
                            (ii) in subparagraph (A)--
                                    (I) in clause (ii), by striking 
                                ``under any'' through the end of the 
                                clause and inserting a period;
                                    (II) by striking the subparagraph 
                                designation ``(A)'';
                                    (III) by redesignating clauses (i) 
                                and (ii) as subparagraphs (A) and (B), 
                                respectively; and
                                    (IV) by redesignating subclauses 
                                (I) and (II) as clauses (i) and (ii), 
                                respectively;
            (2) in subsection (b)--
                    (A) by amending the heading to read as follows: 
                ``Requirements To Qualify Loans for Insurance and 
                Interest Subsidies.--'';
                    (B) in paragraph (1)--
                            (i) by amending the heading to read as 
                        follows: ``Requirements.--'';
                            (ii) by amending the matter preceding 
                        subparagraph (A) to read as follows: ``A loan 
                        by an eligible lender shall be insurable by the 
                        Secretary, and students who receive such loans 
                        shall be entitled to have made on their behalf 
                        the payments provided for in subsection (a), 
                        under a program of student loan insurance 
                        that--'';
                            (iii) by amending subparagraph (K) to read 
                        as follows:
                    ``(K) provides that the holder of any such loan 
                will be required to submit to the Secretary, at such 
                time or times and in such manner as the Secretary may 
                prescribe, statements containing such information as 
                may be required by regulation for the purpose of 
                enabling the Secretary to determine the amount of the 
                payment which must be made with respect to that 
                loan;'';
                            (iv) by amending subparagraph (O) to read 
                        as follows:
                    ``(O) provides that, if the sale, assignment, or 
                other transfer of a loan made under this part to 
                another holder will result in a change in the identity 
                of the party to whom the borrower must send subsequent 
                payments or direct any communications concerning the 
                loans, then--
                            ``(i) the transferor and the transferee 
                        shall be required, not later than 45 days from 
                        the date the transferee acquires a legally 
                        enforceable right to receive payment from the 
                        borrower on such loan, either jointly or 
                        separately to provide a notice to the borrower 
                        of--
                                    ``(I) the sale, assignment, or 
                                other transfer;
                                    ``(II) the identity of the 
                                transferee;
                                    ``(III) the name and address of the 
                                party to whom subsequent payments or 
                                communications must be sent; and
                                    ``(IV) the telephone numbers of 
                                both the transferor and the transferee; 
                                and
                            ``(ii) the transferee shall be required to 
                        notify the Secretary, and, upon the request of 
                        an institution of higher education, the 
                        Secretary shall notify the last such 
                        institution the student attended prior to the 
                        beginning of the repayment period of any loan 
                        made under this part, of--
                                    ``(I) any sale, assignment, or 
                                other transfer of the loan; and
                                    ``(II) the address and telephone 
                                number by which contact may be made 
                                with the new holder concerning 
                                repayment of the loan;
                        except that this subparagraph shall apply only 
                        if the borrower is in the grace period 
                        described in section 427(a)(2)(B) or 428(b)(7) 
                        or is in repayment status.'';
                            (v) in subparagraph (Q), by striking 
                        ``guarantee'' and ``428A'' and inserting 
                        ``insurance'' and ``428H'', respectively;
                            (vi) by amending subparagraph (R) to read 
                        as follows:
                    ``(R) provides for the making of such reports, in 
                such form and containing such information, including 
                financial information, as the Secretary may reasonably 
                require to carry out the Secretary's functions under 
                this part and protect the financial interest of the 
                United States, and for keeping such records and for 
                affording such access thereto as the Secretary may find 
                necessary to ensure the correctness and verification of 
                such reports;'';
                            (vii) by amending subparagraph (S) to read 
                        as follows:
                    ``(S) provides that a lender shall pay a default 
                prevention fee in accordance with subsection (g);'';
                            (viii) in subparagraph (T)--
                                    (I) in clause (i), by inserting ``, 
                                by the guaranty agency, in accordance 
                                with regulations prescribed by the 
                                Secretary,'' after ``limitation''; and
                                    (II) in clause (ii)--
                                            (aa) in the matter 
                                        preceding subclause (I), by 
                                        inserting ``, in accordance 
                                        with regulations prescribed by 
                                        the Secretary,'' after 
                                        ``institution'';
                                            (bb) by striking subclauses 
                                        (I) and (II); and
                                            (cc) by redesignating 
                                        subclauses (III), (IV), and (V) 
                                        as subclauses (I), (II), and 
                                        (III), respectively;
                            (ix) by amending subparagraph (U) to read 
                        as follows:
                    ``(U) provides--
                            ``(i) for such additional criteria 
                        concerning the eligibility of lenders described 
                        in section 435(d)(1) as may be permitted by the 
                        Secretary; and
                            ``(ii) an assurance that the guaranty 
                        agency will report to the Secretary concerning 
                        changes in criteria under clause (i), including 
                        any procedures in effect under such program to 
                        take emergency action, limit, suspend, or 
                        terminate lenders; and''; and
                            (x) by striking subparagraphs (V), (W), and 
                        (X);
                    (C) by amending paragraph (2) to read as follows:
            ``(2) Skip-tracing requirement.--In the case of a default 
        claim based on an inability to locate the borrower, a lender 
        shall certify to the Secretary, at the time of submission of 
        the default claim, that diligent attempts have been made to 
        locate the borrower through the use of reasonable skip-tracing 
        techniques in accordance with regulations prescribed by the 
        Secretary.'';
                    (D) in paragraph (3)(B), by striking the 
                parenthetical through the end of the subparagraph and 
                inserting a period; and
                    (E) by striking out paragraph (5) and inserting in 
                lieu thereof the following new paragraph:
            ``(5) Compliance audits.--(A) Except as provided in 
        subparagraph (B) or by the Single Audit Act Amendments of 1996, 
        an eligible lender that originates or holds more than 
        $5,000,000 in loans made under this title during an annual 
        audit period shall submit to the Secretary a compliance audit 
        for that audit period which is conducted by a qualified, 
        independent organization or person in accordance with the 
        Government Auditing Standards issued by the Comptroller 
General, and the regulations of the Secretary.
            ``(B) The Secretary may permit a lender to submit the 
        results of an audit conducted for other purposes if the 
        Secretary determines that such other audit results provide the 
        same information as required under subparagraph (A).'';
            (3) in subsection (c)--
                    (A) by amending the heading to read as follows: 
                ``Agreements With Guaranty Agencies.--''
                    (B) in paragraph (3)--
                            (i) in the matter preceding subparagraph 
                        (A), by striking ``A guaranty agreement'' and 
                        inserting ``An agreement between the Secretary 
                        and a guaranty agency'';
                            (ii) in the flush left language at the end 
                        of the paragraph, by striking ``Guaranty 
                        agencies'' and inserting ``The Secretary''; and
                            (iii) by redesignating paragraph (3) as 
                        paragraph (11);
                    (C) by striking paragraphs (1), (2), (4), and (5);
                    (D) by inserting after the subsection heading the 
                following new paragraphs:
            ``(1) Authority to enter into agreements.--(A)(i) The 
        Secretary may enter into an agreement with a guaranty agency, 
        under which the Secretary shall insure loans made under this 
        section through the guaranty agency as the agent of the 
        Secretary.
            ``(ii) Any guaranty agency that had an agreement with the 
        Secretary under section 428(b) as of the day before the date of 
        enactment of the Student Financial Aid Improvements Act of 1997 
        may enter into an initial agreement with the Secretary under 
        this subsection.
            ``(iii) An agreement under this subsection shall be 5 years 
        in duration, and may be renewed by the Secretary for successive 
        5-year periods.
            ``(iv) The Secretary may terminate the agreement prior to 
        its expiration in accordance with paragraph (9).
            ``(2) Effect on prior guaranty agreements and loan 
        insurance by guaranty agencies.--(A) All guaranty agreements 
        made under this subsection as it was in effect on the day 
        before the date of enactment of the Student Financial Aid 
        Improvements Act of 1997 shall terminate not later than 180 
        days after the date of enactment of that Act.
            ``(B) Notwithstanding any other provision of law--
                    ``(i) to the extent that a guaranty agency had 
                insured loans under this part, loan insurance by such 
                guaranty agency that is outstanding as of the date of 
                the termination under subparagraph (A) shall be 
                replaced on such date by loan insurance issued by the 
                Secretary, and the guaranty agency shall be relieved of 
                any further liability thereon;
                    ``(ii) the Secretary's liability for any 
                outstanding liabilities of a guaranty agency (other 
                than outstanding loan insurance under this part), shall 
                not exceed the fair market value of the unrestricted 
                funds of the guaranty agency, which shall consist of--
                            ``(I) all accumulated earnings not 
                        otherwise placed in a restricted account in 
                        accordance with section 422(h)(2)(A); and
                            ``(II) any working capital that may be 
                        provided under section 422(h)(2)(B); and
                    ``(iii) for the first year after the date of 
                enactment of the Student Financial Aid Improvements Act 
                of 1997, the Secretary may specify such interim 
                administrative measures as the Secretary determines to 
                be necessary for the efficient transfer of the loan 
                insurance function, and to carry out the purposes of 
                this part.
            ``(3) Terms of agreement.--The agreement between the 
        Secretary and a guaranty agency shall include, but not be 
        limited to--
                    ``(A) provisions regarding the responsibilities of 
                the guaranty agency for--
                            ``(i) administering the issuance of 
                        insurance on loans made under this section on 
                        behalf of the Secretary;
                            ``(ii) monitoring insurance commitments 
                        made under this section;
                            ``(iii) default prevention activities;
                            ``(iv) review of default claims made by 
                        lenders;
                            ``(v) payment of default claims;
                            ``(vi) collection of defaulted loans;
                            ``(vii) adoption of internal systems of 
                        accounting and auditing that are acceptable to 
                        the Secretary, and reporting the result thereof 
                        to the Secretary on a timely, accurate, and 
                        auditable basis;
                            ``(viii) timely and accurate collection and 
                        reporting of such other data as the Secretary 
                        may require to carry out the purposes of the 
                        programs under this title;
                            ``(ix) monitoring of institutions and 
                        lenders participating in the program under this 
                        part; and
                            ``(x) such other program functions as the 
                        Secretary may require of the guaranty agency;
                    ``(B) provisions regarding the fees the Secretary 
                shall pay to the guaranty agency under the agreement, 
                and other revenues that the guaranty agency may receive 
                thereunder, as described in paragraphs (4) and (6);
                    ``(C) provisions requiring the guaranty agency to 
                carry out its responsibilities under the agreement in 
                accordance with paragraph (5);
                    ``(D) provisions regarding the use, in accordance 
                with paragraph (10), of net revenues in excess of the 
                guaranty agency's need for working capital, as 
                determined after compliance with section 422(h), for 
                such other activities in support of postsecondary 
                education as may be agreed to by the Secretary and the 
                guaranty agency;
                    ``(E) provisions regarding such other businesses, 
                previously purchased or developed with reserve funds, 
                that relate to the program under this part and in which 
                the Secretary permits the guaranty agency to engage (as 
                determined on a case-by-case basis);
                    ``(F) provisions setting forth such administrative 
                and fiscal procedures as may be necessary to protect 
                the United States from the risk of unreasonable loss 
                thereunder, and to ensure proper and efficient 
                administration of the loan insurance program;
                    ``(G) provisions regarding the submission of the 
                results of audits of the guaranty agency that are 
                conducted--
                            ``(i) at least annually;
                            ``(ii) by a qualified, independent 
                        organization or person in accordance with the 
                        standards established by the Comptroller 
                        General for the audit of governmental 
                        organizations, programs, and functions; and
                            ``(iii) in accordance with the regulations 
                        of the Secretary;
                    ``(H) provisions requiring the making of such 
                reports, in such form and containing such information, 
                including financial information, as the Secretary may 
                reasonably require to carry out the Secretary's 
                functions under this part and to protect the Federal 
                fiscal interest, and for keeping such records and for 
                affording such access thereto as the Secretary may find 
                necessary or appropriate to ensure the correctness and 
                verification of such reports;
                    ``(I) adequate assurances that the guaranty agency 
                will not engage in any pattern or practice which may 
                result in a denial of a borrower's access to loans 
                under this part because of the borrower's race, sex, 
                color, religion, national origin, age, handicapped 
                status, income, attendance at a particular eligible 
                institution, length of the borrower's educational 
                program, or the borrower's academic year in school;
                    ``(J) assurances that--
                            ``(i) upon the request of an eligible 
                        institution, the guaranty agency shall, subject 
                        to clauses (ii) and (iii), furnish to 
the institution information with respect to students (including the 
names and addresses of such students) who received loans made or 
insured under this part for attendance at the eligible institution and 
for whom preclaims assistance activities have been requested under 
subsection (l);
                            ``(ii) the guaranty agency shall require 
                        the payment by the institution of a reasonable 
                        fee (as determined in accordance with 
                        regulations prescribed by the Secretary) for 
                        such information; and
                            ``(iii) the institution may use such 
                        information only to remind students of their 
                        obligation to repay student loans and may not 
                        disseminate the information for any other 
                        purpose; and
                    ``(K) such other provisions as the Secretary may 
                determine to be necessary to protect the United States 
                from the risk of unreasonable loss and to promote the 
                purposes of this part.
            ``(4) Fees and other revenues.--(A)(i) The Secretary shall 
        pay to a guaranty agency with an agreement under this 
        subsection the following uniform fees:
                    ``(I) a 1-time issuance fee for each new loan made 
                under this part that is insured by the Secretary 
                through the guaranty agency; and
                    ``(II) an annual maintenance fee for each active 
                borrower account.
            ``(ii) The fees described in clause (i) shall be paid on a 
        quarterly basis, from the funds available under section 458(a), 
        in such amount as the Secretary determines, for all guaranty 
        agencies with agreements under this subsection.
            ``(B) A guaranty agency with an agreement under this 
        subsection also may receive revenues derived from--
                    ``(i) a default prevention fee paid by lenders in 
                accordance with subsection (g);
                    ``(ii) the collection retention allowance under 
                paragraph (6);
                    ``(iii) the interest earned on working capital 
                provided under section 422(h);
                    ``(iv) such other businesses, previously purchased 
                or developed with reserve funds, that relate to the 
                program under this part and in which the Secretary 
                permits the guaranty agency to engage (as determined on 
                a case-by-case basis); and
                    ``(v) such other fees as may be authorized under 
                this part.
            ``(5) Performance requirements.--(A) A guaranty agency with 
        an agreement under this subsection shall carry out its 
        responsibilities thereunder in accordance with such measurable 
        performance-based standards as the Secretary may specify, and 
        shall submit timely and accurate data to the Secretary in 
        support of its performance.
            ``(B) The Secretary shall apply the performance standards 
        uniformly to guaranty agencies with agreements under this 
        subsection.
            ``(C) The Secretary shall assess the performance of each 
        guaranty agency on the basis of the audits required under 
        paragraph (3)(G), and shall compare such guaranty agency's 
        performance against the performance of other such guaranty 
        agencies and publicly disseminate such comparison.
            ``(D) The Secretary may impose a fine, in accordance with 
        the terms of the agreement, on a guaranty agency that fails to 
        achieve a specified level of performance on 1 or more 
        performance standards. If the guaranty agency's failure to 
        achieve such performance level results in a financial loss to 
        the United States, the guaranty agency shall indemnify the 
        Secretary for such loss.'';
                    (E) by amending paragraph (6) to read as follows:
            ``(6) Collection retention allowance.--
                    ``(A) If, after the Secretary has paid a claim on a 
                loan made under this title, any payments are made in 
                discharge of the obligation incurred by the borrower 
                with respect to such loan (including any payments of 
                interest accruing on such loan after the payment of the 
                default claim by the Secretary), there shall be paid 
                over to the Secretary that portion of the payments 
                remaining after the guaranty agency with which the 
                Secretary has an agreement under this subsection has 
                deducted from such payments an amount for costs related 
                to the student loan insurance program that--
                            ``(i) shall be specified by the Secretary 
                        on the basis of the Secretary's review of 
                        payments for similar services in a competitive 
                        environment; and
                            ``(ii) in no case shall exceed 18.5 percent 
                        of such payments (subject to subparagraph (B)).
                    ``(B) If, after the Secretary has paid a claim on a 
                loan made under this title, and the liability on such 
                loan is discharged by payment of the proceeds of a 
                consolidation loan under this part or under part D, the 
                guaranty agency may not deduct the amount specified in 
                subparagraph (A), but may charge the borrower an amount 
                specified by the Secretary and not to exceed 18.5 
                percent of the principal amount of the defaulted loan 
                at the time of consolidation, to defray the guaranty 
                agency's collection costs on the defaulted loan to be 
                consolidated.'';
                    (F) by amending paragraph (7) to read as follows:
            ``(7) Secretary authorized to renew or make alternate 
        agreements.--Notwithstanding any other provision of law, once 
        the initial agreement with a guaranty agency entered into after 
        the date of enactment of the Student Financial Aid Improvements 
        Act of 1997 has ended (through its expiration, the termination 
        of the guaranty agency agreement by the Secretary in accordance 
        with paragraph (9), or the resignation of the guaranty agency, 
        as the case may be), the Secretary, in his discretion, may 
        enter into--
                    ``(A) another agreement with the guaranty agency;
                    ``(B) an alternate agreement under which the 
                functions previously performed by the guaranty agency 
                shall be performed by another State or private 
                nonprofit agency with which the Secretary has an 
                agreement under this subsection; or
                    ``(C) a contract under section 428E.'';
                    (G) by amending paragraph (9) to read as follows:
            ``(9) Termination of guaranty agency agreements.--(A) A 
        guaranty agency's agreement under this subsection may be ended 
        in advance of its expiration date in accordance with 
        subparagraph (B) or (C). If its agreement is so ended, the 
        guaranty agency shall immediately--
                    ``(i) cease to be an agent of the Secretary for 
                purposes of the program under this part; and
                    ``(ii) surrender all remaining liquid and nonliquid 
                reserve funds, and assets purchased or developed with 
                reserve funds, still held by the guaranty agency 
                (including reserves held by, or under the control of, 
                any other entity) to the Secretary or the Secretary's 
                designated agent.
            ``(B) A guaranty agency's agreement under this subsection 
        shall be void, and the Secretary shall immediately so notify 
        such guaranty agency, if--
                    ``(i) the guaranty agency fails to comply in a 
                timely manner with the recall of reserve requirements 
                of section 422(h);
                    ``(ii) the guaranty agency fails to increase the 
                amount of funds in its unrestricted account (as 
                measured by comparing the amount of funds in such 
                account at the beginning and end of a year) for each of 
                2 years (that may or may not be consecutive) in the 5-
                year period of the agreement under this subsection;
                    ``(iii) any other agreement that the guaranty 
                agency has with the Secretary is terminated;
                    ``(iv) the guaranty agency becomes insolvent or 
                declares bankruptcy; or
                    ``(v) there is any legal impediment to the guaranty 
                agency substantially performing its responsibilities 
                under the agreement.
            ``(C) The Secretary shall, after notice and opportunity for 
        a hearing, terminate a guaranty agency that has substantially 
        failed to achieve an acceptable level of performance under its 
        agreement with the Secretary. A substantial performance failure 
        under this subparagraph may include the existence of material 
        internal control weaknesses relating to data quality in the 
        guaranty agency's audits for each of 2 years (that may or may 
        not be consecutive) in the 5-year period of the agreement under 
        this subsection.
            ``(D) Notwithstanding any other provision of Federal or 
        State law, if the Secretary has terminated or is seeking to 
        terminate a guaranty agency's agreement in advance of its 
        expiration date--
                    ``(i) no State court may issue any order affecting 
                the Secretary's actions with respect to such guaranty 
                agency;
                    ``(ii) any contract with respect to the 
                administration of reserve funds held by a guaranty 
                agency, or the administration of any assets purchased 
                or developed with the reserve funds of the guaranty 
                agency, that is entered into or extended by the 
                guaranty agency, or any other party on behalf of or 
                with the concurrence of the guaranty agency, after the 
                date of enactment of the Student Financial Aid 
                Improvements Act of 1997 shall provide that the 
                contract is terminable by the Secretary upon 30 days 
                notice to the contracting parties if the Secretary 
                determines that such contract includes an impermissible 
                transfer of the reserve funds or assets, or is 
                otherwise inconsistent with the terms or purposes of 
                this section; and
                    ``(iii) no provision of State law shall apply to 
                the actions of the Secretary in terminating the 
                operations of a guaranty agency.''; and
                    (H) by adding after paragraph (9) the following new 
                paragraph:
            ``(10) Use of surplus funds.--(A) A guaranty agency with an 
        agreement under this subsection may retain the amount 
        determined in accordance with subparagraph (B) for activities 
        in support of postsecondary education that are approved by the 
        Secretary.
            ``(B)(i) A guaranty agency may retain 50 percent of its net 
        revenues for fiscal year 1998 in excess of the guaranty 
        agency's need for working capital for such year, as determined 
        after compliance with section 422(h), for approved activities.
            ``(ii) A guaranty agency may retain for approved activities 
        for fiscal year 1999 and succeeding fiscal years the lesser 
        of--
                    ``(I) 50 percent of its net revenues for such year 
                in excess of its need for working capital, as 
                determined after compliance with section 422(h); or
                    ``(II) the amount of its net revenues for such year 
                in excess of its need for working capital, as 
                determined after compliance with section 422(h), that 
                is equal to a uniform percentage, established annually 
                by the Secretary, of Federal revenues received by the 
                guaranty agency for the preceding year. In determining 
                such percentage, the Secretary shall take into account 
                all guaranty agencies' revenues and costs for the 
                preceding year to determine an adequate level of 
                economic incentive for guaranty agencies to maximize 
                their efficiency.'';
            (4) by amending subsection (g) to read as follows:
    ``(g) Default Prevention Fee Paid by Lenders.--(1) An eligible 
lender shall pay a guaranty agency, to which such lender referred a 
delinquent loan, a default prevention fee of not to exceed $100 per 
borrower account if the guaranty agency succeeds in bringing such loan 
into current repayment status.
    ``(2) The Secretary shall prescribe in regulations the 
circumstances in which a lender may obtain a refund of a default 
prevention fee if the borrower of a loan on which such fee was paid 
subsequently defaults on such loan.''; and
            (5) in subsection (l)--
                    (A) in paragraph (1), by striking the paragraph 
                designation and the paragraph heading; and
                    (B) by striking paragraph (2).
    (b) Section 435(j) of the Act is amended by striking ``section 
428(b).'' and inserting ``section 428(c).''

SEC. 227. REPEAL OF STATE SHARE OF DEFAULT COSTS.

    Section 428 of the Act is further amended by striking subsection 
(n).

SEC. 228. CONSOLIDATION LOANS.

    (a) Section 428C of the Act is further amended--
            (1) in subsection (a)(3)--
                    (A) in subparagraph (A), by inserting ``in an in-
                school period,'' after ``for a consolidation loan is''; 
                and
                    (B) in subparagraph (B), by amending clause (i) to 
                read as follows:
                            ``(i) Eligible student loans received by 
                        the eligible borrower may be added to a 
                        consolidation loan during the 180-day period 
                        following the making of such consolidation 
                        loan.'';
            (2) in subsection (b)(4)(C), by amending clause (ii) to 
        read as follows:
                    ``(ii) provides that interest shall accrue and be 
                paid--
                            ``(I) by the Secretary, in the case of a 
                        consolidation loan made before October 1, 1997, 
                        that consolidated only Federal Stafford Loans 
                        for which the student borrower received an 
                        interest subsidy under section 428;
                            ``(II) by the Secretary, in the case of a 
                        consolidation loan made on or after October 1, 
                        1997, except that the Secretary shall pay such 
                        interest only on that portion of the loan that 
                        repays Federal Stafford Loans for which the 
                        student borrower received an interest subsidy 
                        under section 428; and
                            ``(III) by the borrower, or capitalized, in 
                        the case of a consolidation loan, or portion 
                        thereof, other than one described in subclause 
                        (I) or (II);''; and
            (3) in subsection (c)--
                    (A) in paragraph (1)--
                            (i) in subparagraph (A), by striking 
                        ``subparagraph (B) or (C).'' and inserting 
                        ``subparagraph (B), (C), (D), or (E), and 
                        subject to subparagraph (F).'';
                            (ii) in subparagraph (C), by striking 
                        ``after July 1, 1994,'' and inserting ``after 
                        July 1, 1994 and before October 1, 1997,''; and
                            (iii) by adding after subparagraph (C) the 
                        following new subparagraphs:
            ``(D) A consolidation loan made on or after October 1, 
        1997, that repays loans made under section 428 of 428H, or a 
        combination thereof, shall bear interest at an annual rate on 
        the unpaid principal balance of the loan that is equal to--
                    ``(i) the rate specified in section 427A(g), in the 
                case of a borrower in an in-school or grace period; or
                    ``(ii) the rate specified in section 427A(h)(1) in 
                all other cases.
            ``(E) A consolidation loan made on or after October 1, 
        1997, that repays loans made under section 428B shall bear 
        interest at an annual rate on the unpaid principal balance of 
        the loan that is equal to the rate specified in section 
        427A(h)(2).
            ``(F) Notwithstanding any other provision of this section, 
        the Secretary may prescribe in regulation such procedures as 
        may be necessary to ensure that--
                    ``(i) a borrower of a consolidation loan that 
                repays a combination of loans eligible to be 
                consolidated under this section, shall continue to 
                receive, after consolidation, any interest subsidy 
                benefits associated with a loan, without extending such 
                benefits to any other loans consolidated that do not 
                have interest subsidy benefits;
                    ``(ii) in the case of a consolidation loan that 
                repays a combination of loans described in 
                subparagraphs (D) and (E), the interest rate on such 
                consolidation loan shall be calculated in a manner that 
                reflects the interest rate applicable to loans made 
                under each such subparagraph; and
                    ``(iii) in the case of a consolidation loan that 
                repays a loan eligible to be consolidated under this 
                section other than those described in subparagraphs (D) 
                and (E), the interest rate applicable to such other 
                loan shall be the interest rate described in 
                subparagraph (D) if such other loan is considered by 
                the Secretary to be subsidized, and the interest rate 
                described in subparagraph (E) if such other loan is 
                considered by the Secretary to be unsubsidized.''; and
                    (B) in paragraph (4)--
                            (i) by striking ``Repayment'' and inserting 
                        ``(A) Except as provided in subparagraph (B), 
                        repayment''; and
                            (ii) by adding after subparagraph (A) (as 
                        redesignated by clause (i)) the following new 
                        subparagraph:
            ``(B) In the case of a consolidation loan that repays a 
        loan made under this part for which the borrower is in an in-
        school period at the time the consolidation application is 
        received, the repayment period for such consolidation loan 
        shall commence after the completion of a grace period, as 
        described in section 428(b)(7)(i).''.

SEC. 229. CONTRACTS WITH OTHER ENTITIES.

    Part B of title IV of the Act is amended by inserting after section 
428D the following new section:

``SEC. 428E. CONTRACT AUTHORITY.

    ``The Secretary may enter into 1 or more contracts to carry out any 
of the functions that otherwise would be carried out by a guaranty 
agency with an agreement under section 428(c).''.

SEC. 230. ELIGIBLE LENDER.

    Section 435(d) of the Act is amended--
            (1) in paragraph (1), by striking ``(6),'' and inserting 
        ``(7),''; and
            (2) by adding after paragraph (6) the following new 
        paragraph:
            ``(7) Uniform terms and conditions.--Subject to such 
        exceptions as the Secretary may prescribe in regulations, the 
        term `eligible lender' shall not include any lender that offers 
        different terms and conditions to different borrowers of the 
        same type of loan made or insured under this part.''.

SEC. 231. SPECIAL ALLOWANCE.

    Section 438 of the Act is amended--
            (1) in subsection (a)(3), by striking ``quarterly rate'' 
        each place it appears and inserting ``rate''; and
            (2) in subsection (b)--
                    (A) in paragraph (2)--
                            (i) by striking ``subparagraphs (B), (C), 
                        (D), (E), and (F)'' and inserting 
                        ``subparagraphs (B), (C), (D), (E), (F), and 
                        (G)''; and
                            (ii) by adding after subparagraph (F) the 
                        following new subparagraph:
            ``(G)(i) Notwithstanding any other provision of this 
        section, in the case of loans made or insured under this part 
        for which the first disbursement is made on or after October 1, 
        1997, the special allowance paid pursuant to this subsection 
        shall be computed for any 12-month period beginning on July 1 
        and ending on June 30 by--
                    ``(I) determining the bond equivalent rate on the 
                preceding June 1 of the securities with a comparable 
                maturity, as established by the Secretary; and
                    ``(II) subtracting the applicable interest rate on 
                such loans from such amount.
            ``(ii) The amount of special allowance computed under 
        clause (i) shall be paid in quarterly increments for the 3-
        month periods described in paragraph (1).''; and
                    (B) in paragraph (3), in the second sentence, by 
                striking ``determined for any such 3-month period shall 
                be paid promptly after the close of such period,'' and 
                inserting ``calculated under this subsection shall be 
paid promptly after the close of the 3-month period for which such 
special allowance payment is due,''.

SEC. 232. STUDENT LOAN MARKETING ASSOCIATION OFFSET FEE.

    Section 439(h)(7) of the Act is amended by adding after 
subparagraph (C) the following new subparagraph:
            ``(D) The calculation of the fee required under 
        subparagraph (A) or (B), as the case may be, shall be 
        determined on the basis of the principal amount of all loans 
        (except for loans made under sections 428C, 439(o) or 439(q))--
                    ``(i) owned, in whole or in part, by the 
                Association, any subsidiary of the Association, or any 
                company, trust or other entity owned by, or controlled 
                by, the Association; or
                    ``(ii) held by a trust (including by a trustee on 
                behalf of a trust), or by any other entity in which the 
                Association, or any subsidiary, holds more than a 
                minimal beneficial interest (as determined by the 
                Secretary).''.

SEC. 233. DIRECT LOAN TRANSITION FEE.

    Section 452(b) of the Act is amended to read as follows:
    ``(b) Transition Fees.--The Secretary shall pay fees to 
institutions of higher education (or a consortium of those 
institutions) with agreements under section 454(b), in the first year 
of their participation in the program authorized by this part, in order 
to compensate for costs associated with their transition to the 
program. The fees shall not exceed an average of $10 per borrower at 
all institutions receiving the fees.''.

SEC. 234. FUNDS FOR ADMINISTRATIVE EXPENSES.

    Section 458(a) of the Act is amended, in the first sentence, by 
striking ``$260,000,000'' through the end of the sentence and inserting 
the following: ``$532,000,000 in fiscal year 1998, $610,000,000 in 
fiscal year 1999, $705,000,000 in fiscal year 2000, $806,000,000 in 
fiscal year 2001, and $904,000,000 in fiscal year 2002.''.

              PART C--NEED ANALYSIS AND GENERAL PROVISIONS

SEC. 241. HOPE SCHOLARSHIP NEED ANALYSIS AMENDMENTS.

    (a) Calculation of Available Income.--
            (1) Section 475 of the Act is amended--
                    (A) by amending subsection (c)(1)(A) to read as 
                follows:
                    ``(A) the sum of--
                            ``(i) Federal income taxes;
                            ``(ii) the amount of any tax credit taken 
                        under section 24 of the Internal Revenue Code 
                        of 1986; and
                            ``(iii) the amount by which tax liability 
                        determined without regard to the deduction 
                        provided under section 221 of the Internal 
                        Revenue Code exceeds the amount of tax 
                        liability determined after taking such 
                        deduction into account;''; and
                    (B) by amending subsection (g)(2)(A) to read as 
                follows:
                    ``(A) the sum of--
                            ``(i) Federal income taxes;
                            ``(ii) the amount of any tax credit taken 
                        by the student under section 24 of the Internal 
                        Revenue Code of 1986; and
                            ``(iii) the amount by which tax liability 
                        determined without regard to the deduction 
                        provided under section 221 of the Internal 
                        Revenue Code exceeds the amount of tax 
                        liability determined after taking such 
                        deduction into account;''.
            (2) Section 476(b)(1)(A)(i) of the Act is amended to read 
        as follows:
                    ``(A) the sum of--
                            ``(i) Federal income taxes;
                            ``(ii) the amount of any tax credit taken 
                        under section 24 of the Internal Revenue Code 
                        of 1986; and
                            ``(iii) the amount by which tax liability 
                        determined without regard to the deduction 
                        provided under section 221 of the Internal 
                        Revenue Code exceeds the amount of tax 
                        liability determined after taking such 
                        deduction into account;''.
            (3) Section 477(b)(1)(A) of the Act is amended to read as 
        follows:
                    ``(A) the sum of--
                            ``(i) Federal income taxes;
                            ``(ii) the amount of any tax credit taken 
                        under section 24 of the Internal Revenue Code 
                        of 1986; and
                            ``(iii) the amount by which tax liability 
                        determined without regard to the deduction 
                        provided under section 221 of the Internal 
                        Revenue Code exceeds the amount of tax 
                        liability determined after taking such 
                        deduction into account;''.
    (b) Definitions.--Section 480 of the Act is amended--
            (1) in subsection (a)(2)--
                    (A) by striking ``and no portion'' and inserting 
                ``no portion''; and
                    (B) by inserting after ``(42 U.S.C. 12571 et 
                seq.),'' the following: ``and no portion of any tax 
                credit taken under section 24 of the Internal Revenue 
                Code of 1986,'';
            (2) in subsection (b)--
                    (A) in paragraph (13), by striking ``and'' at the 
                end of the paragraph;
                    (B) by redesignating paragraph (14) as paragraph 
                (15); and
                    (C) by inserting after paragraph (13) the following 
                new paragraph:
            ``(14) any tax deduction taken under section 221 of the 
        Internal Revenue Code of 1986; and'';
            (3) in subsection (e)--
                    (A) in paragraph (3), by striking ``and'' at the 
                end of the paragraph;
                    (B) in paragraph (4), by striking the period at the 
                end of the paragraph and inserting ``; and''; and
                    (C) by adding after paragraph (4) the following new 
                paragraph:
            ``(5) any tax credit taken under section 24 of the Internal 
        Revenue Code of 1986; and'';
            (4) in subsection (j), by adding after paragraph (3) the 
        following new paragraph:
    ``(4) Notwithstanding paragraph (1), a tax credit taken under 
section 24 of the Internal Revenue Code of 1986 shall not be treated as 
estimated financial assistance for purposes of section 471(3).''.

242. INCOME PROTECTION ALLOWANCE FOR INDEPENDENT STUDENTS WITHOUT 
              DEPENDENTS.

    (a) Section 476(b) of the Act is amended--
            (1) in paragraph (1)--
                    (A) in subparagraph (A)--
                            (i) by amending clause (iv) to read as 
                        follows:
                            ``(iv) an income protection allowance, 
                        determined in accordance with paragraph (4);''; 
                        and
                            (ii) in clause (v), by striking ``paragraph 
                        (4);'' and inserting ``paragraph (5);''; and
                    (B) in subparagraph (B), by striking ``paragraph 
                (5).'' and inserting ``paragraph (6).'';
            (2) by redesignating paragraphs (4) and (5) as paragraphs 
        (5) and (6), respectively; and
            (3) by inserting after paragraph (3) the following new 
        paragraph:
            ``(4) Income protection allowance.--The income protection 
        allowance is determined by the following table (or a successor 
        table prescribed by the Secretary under section 478):
      

                      ``INCOME PROTECTIVE ALLOWANCE                     
------------------------------------------------------------------------
                                             Number in College          
 Family Size (including student) ---------------------------------------
                                           1                   2        
------------------------------------------------------------------------
    1...........................              8,000                     
    2...........................             10,520            8,720''. 
------------------------------------------------------------------------

    (b) Section 478(b) of the Act is amended by striking ``sections 
475(c)(4) and 477(b)(4).'' and inserting ``sections 475(c)(4), 
476(b)(4), and 477(b)(4).''.

SEC. 243. HOPE SCHOLARSHIP DEFINITIONS.

    Section 481 of the Act is amended by adding after subsection (f) 
the following new subsection:
    ``(g) Hope Scholarship Definitions.--
            ``(1) As necessary for purposes of the tax credit provided 
        under section 24 of the Internal Revenue Code of 1986, and the 
        deduction provided under section 221 of such Code, the 
        Secretary of Education shall define in regulation the following 
        terms:
                    ``(A) Academic period.
                    ``(B) Normal full-time workload.
                    ``(C) First 2 years of postsecondary education.
                    ``(D) Qualifying grade point average.
                    ``(E) Job skills.
                    ``(F) New job skills.
            ``(2) Notwithstanding any other provision of law, the 
        regulations described in paragraph (1) shall not be subject to 
        section 482(c).''.

SEC. 244. EXTENSION OF STUDENT AID PROGRAMS.

    Title IV of the Act is amended--
            (1) in section 401(a)(1), by striking ``September 30, 
        1998,'' and inserting ``September 30, 1999,'';
            (2) in section 424(a), by striking ``1998.'' and ``2002.'' 
        and inserting ``2002.'' and ``2006.'', respectively;
            (3) in section 428(a)(5), by striking ``1998,'' and 
        ``2002.'' and inserting ``2002,'' and ``2006.'', respectively;
            (4) in section 428C(e), by striking ``1998.'' and inserting 
        ``2002.''; and
            (5) in section 466--
                    (A) in subsection (a)--
                            (i) in the matter preceding paragraph (1), 
                        by striking ``September 30, 1996,'' and ``March 
31, 1997,'' and inserting ``September 30, 1998,'' and ``March 31, 
1999'', respectively; and
                            (ii) in paragraph (1), by striking 
                        ``September 30, 1996,'' and inserting 
                        ``September 30, 1998,'';
                    (B) in subsection (b), by striking ``September 30, 
                1996,'' and inserting ``September 30, 1998,''; and
                    (C) in subsection (c), by striking out ``October 1, 
                1997,'' and inserting ``October 1, 1998,''.

                        PART D--EFFECTIVE DATES

SEC. 251. EFFECTIVE DATES.

    (a) Except as otherwise provided in this section, the amendments 
made by this title shall take effect on the date of enactment of this 
Act.
    (b) Section 211 is effective for the calculation of Pell Grant 
awards for award years beginning on or after July 1, 1998.
    (c) Section 222 is effective for a loan made under part B or part D 
of title IV of the Act for which the first disbursement is made on or 
after October 1, 1997.
    (d) Section 223(a)(3) and section 428(b)(5)(C) of the Act (as added 
by section 226(a)(2)(E)) are effective as if they were enacted on July 
23, 1992.
    (e) Sections 224, 229, and 230 take effect on October 1, 1997.
    (f) Section 231 is effective for a loan made or insured under part 
B of title IV of the Act for which the first disbursement is made on or 
after October 1, 1997.
    (g) Section 232 is effective as if it were enacted on August 10, 
1993, but does not apply to the privatized entity that may be created 
as a result of the Student Loan Marketing Association Reorganization 
Act of 1996 (title VI of the Departments of Labor, Health and Human 
Services, Education and Related Agencies Appropriations Act, 1997, as 
enacted by section 101(e) of division A of Public Law 104-208).
    (h) Section 242 is effective for determinations of need for 
academic years beginning on or after July 1, 1998.
                                 <all>