II 109th CONGRESS 1st Session S. 1964 IN THE SENATE OF THE UNITED STATES November 4, 2005 Ms. Snowe (for herself and Mr. Schumer) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to modify the determination and deduction of interest on qualified education loans.

1.

Interest determinations on student loans

(a)

In general

Section 221 of the Internal Revenue Code of 1986 (relating to interest on education loans) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: (f)

Determination of interest paid

In the case of a qualified education loan made after December 31, 2004, for purposes of this section and notwithstanding any other provision of this title— (1)

In general

(A)

Treatment as interest

Any payment on such loan shall be treated as a payment of interest to the extent of the balance, immediately before such payment, in the accumulated interest account with respect to such loan. (B)

Exception

Subparagraph (A) shall not apply to any payment of collection costs, late fees, and penalties. (2)

Accumulated interest account

(A)

In general

The term accumulated interest account means an account which is adjusted in accordance with this paragraph. (B)

Increases

The balance in the accumulated interest account shall be increased for any period by the sum of— (i)the loan origination fees incurred by the borrower in such period, (ii)the amount of stated interest on the loan for such period, and (iii)the amount of any fee imposed under section 428(b)(1)(H) of the Higher Education Act of 1965 (20 U.S.C. 1078(b)(1)(H)). (C)

Decreases

The balance in the accumulated interest account shall be decreased (but not below zero) by payments made on the loan to the extent treated as interest under this section. (3)

Loan origination fees

(A)

Federal programs

The term loan origination fee includes any fee imposed under any of the following provisions of the Higher Education Act of 1965: (i)Section 438(c) (20 U.S.C. 1087–1(c)). (ii)Section 455(c) (20 U.S.C. 1087e(c)). (B)

Fees for services or property excluded

Except as provided under subparagraph (A), the term loan origination fee does not include any fee which is a fee for services or property. (4)

Stated interest

The term stated interest means, with respect to any period, the amount of interest determined for the period based on the stated rate of interest applicable to the period (whether or not the interest is required to be paid in such period). (5)

Anti-abuse rule

The Secretary may prescribe rules to prevent the acceleration or deceleration of additions to the accumulated interest account where the loan origination fees or stated interest do not properly reflect the substance of the loan. . (b)

Information returns

(1)

Interest and loan origination fee defined

Subsection (e) of section 6050S of such Code (relating to the general rule for form and manner of returns) is amended by inserting before the period at the end the following: , and the term interest has the same meaning as when used in section 221. (2)

Pre-2005 loans

The regulations under section 6050S of the Internal Revenue Code of 1986 which are applicable to loans made before September 1, 2004, shall also apply to loans made on or after such date which are made before January 1, 2005. (c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2004.