[Congressional Record Volume 143, Number 45 (Wednesday, April 16, 1997)]
[Senate]
[Pages S3282-S3286]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. McCONNELL (for himself, Mr. Graham, Mr. Shelby, Mr. 
        Breaux, Mr. Coverdell, Mr. Glenn, Mr. Cochran, Mr. Murkowski, 
        Mr. DeWine, Mr. Mack, Mr. Robb, Mr. Specter, Mrs. Hutchison, 
        Mr. Bennett, Mr. D'Amato, Ms. Landrieu, and Mr. Warner):
  S. 594. A bill to amend the Internal Revenue Code of 1986 to modify 
the tax treatment of qualified State tuition programs; to the Committee 
on Finance.


                    THE COLLEGE SAVINGS ACT OF 1997

  Mr. McCONNELL.  Mr. President, I have come to the floor today to 
introduce legislation that addresses an important issue facing families 
today--the education of their children. For the past several years, I 
have worked to make college more affordable by rewarding families who 
save. In both the 103d and 104th Congresses, I introduced legislation--
S. 1787 and S. 386 respectively--to make earnings invested in State-
sponsored tuition savings plans exempt from Federal taxation.

  States have recognized the needs of families and have provided 
incentives for them to save or prepay their children's education. State 
savings plans provide families, a safe, affordable and disciplined 
means of paying for their children's education. The College Savings Act 
of 1997, will provide Federal tax incentives to provide additional 
assistance to the efforts of the States.
  According to GAO, tuition at a 4-year university rose 234 percent 
between 1980-94. During this same period, median household income rose 
84 percent and the consumer price index rose a mere 74 percent. The 
College Board reports that tuition costs for the 1996-97 school year 
will rise 5 percent while average room and board costs will rise 
between 4-6 percent. While education costs have moderated throughout 
the 1990's, they continue to outstrip the gains in income. Tuition has 
now become the greatest barrier to attendance.
  Due to the rising cost of education, more and more families have come 
to rely on financial aid to meet tuition costs. In fact, a majority of 
all college students accept some amount of financial assistance. In 
1995, $50 billion in financial aid was available to students from 
Federal, State, and institutional sources. This was $3 billion higher 
than the previous year. A majority of this increase has come in the 
form of loans, which now make up the largest portion of the total 
Federal aid package at 57 percent. Grants, which a decade ago made up 
49 percent of assistance, have been reduced to 42 percent. This shift 
toward loans further burdens students and families with additional 
interest costs.
  In response to this trend, the Republican Congress and the President 
have developed different proposals to address the rising cost of a 
post-secondary education. S. 1, the Safe and Affordable Schools Act, 
provides incentives for families to save for their children's college 
education through education savings accounts and State-sponsored 
savings plans. For those burdened by student loans, this legislation 
also makes the interest paid on student loans deductible, The President 
has offered two tax provisions, the HOPE scholarship, which is a $1,500 
tax credit and a $10,000 tax deduction for tuition expenses.
  A provision in S. 1 makes the earnings in State-sponsored tuition 
savings plans exempt from taxation. Like the legislation I am 
introducing today, this provision recognizes the leadership States have 
taken in helping families save for college. In the mid-1980's States 
identified the difficulty families had in keeping pace with the rising 
cost of education. States like Michigan, Florida, Ohio, and Kentucky 
were the first programs to be started in order to help families save 
for college. Today, there are 15 States with programs in operation. An 
additional four States will implement their programs this year. 
According to the College Savings Network every other State, except 
Georgia, which has implemented the HOPE Scholarship Program, is 
preparing legislation or is studying a proposal to help their residents 
save for college.
  Today there are 600,000 participants contributing over $3 billion to 
education savings nationwide. By year end, the College Savings Plan 
Network estimates that they will have 1 million participants. By 2006, 
they estimate that over $6 billion will be invested in State-sponsored 
programs.
  Kentucky established its plan in 1988 to provide residents with an 
affordable means of saving for college. Today, 2,602 Kentucky 
participants have contributed over $5 million toward their childrens' 
education.
  Many Kentuckians are drawn to this program because it offers a low-
cost, disciplined approach to savings. In fact, the average monthly 
contribution in Kentucky is just $49. This proposal rewards those who 
are serious about their future and are committed over the long-term to 
the education of their children by exempting all interest earnings from 
State taxes. It is also important to note that 58 percent of the 
participants earn under $60,000 per year. Clearly, this benefits 
middle-class families.
  Last year, Congress took the first step in providing tax relief to 
families investing in those programs. The provisions contained in the 
Small Business Job Protection Act of 1996 clarified the tax treatment 
of both the State-sponsored tuition savings plans and the participants' 
investment. This measure put an end to the tax uncertainty that has 
hampered the effectiveness of these State-sponsored programs and helped 
families who are tying to save for their childrens' education.
  Already, we can see the result of the tax reforms in the 104th 
Congress. Last year, Virginia started its plan and was overwhelmed by 
the positive response. In its first year, the plan sold 16,111 
contracts raising $260 million. This success exceeded all goals for 
this program. While we made important gains last year, we need to 
finish what we have started and fully exempt the investment income from 
taxation.
  The legislation I am introducing today with the support of Senator 
Graham and others will make the savings in State pre-paid tuition plans 
exempt from taxation. While the measure is similar to the provision in 
S. 1, it is a more comprehensive proposal that has been developed in 
close consultation with the States. In addition to tax exemption, the 
bill expands the definition of qualified education expense to include 
room and board costs. This is important since such costs can amount to 
50 percent of total college expenses.
  It also allows individuals who invested in series EE savings bonds to 
contribute these education savings bonds to qualified State tuition 
programs.
  This is a commonsense provision that will give those who are already 
saving the flexibility to invest in prepaid plan if available. It also 
clarifies the law to permit States to establish scholarship programs 
within the plan. The bill also makes several other minor changes that 
will help the programs to operate more efficiently, including 
clarification of the transition rule, permitting the transfer of 
benefits to cousins and stepchildren, and permitting States to include 
proprietary schools as eligible institutions.
  This legislation is a serious effort to encourage long-term saving. 
It is important that we not forget that compound interest cuts both 
ways. By saving, participants can keep pace with tuition increases 
while putting a little away at a time. By borrowing, students must bear 
added interest costs that add thousands to the total cost of tuition.
  During the election the President unveiled his education tax 
proposals. There are two primary provisions of the President's 
proposal. The first is the HOPE scholarship, which would

[[Page S3283]]

allow a parent or student to claim a $1,500 nonrefundable tax credit 
for tuition expenses. The other is a $10,000 tax deduction to be 
applied toward tuition expenses.
  The most disturbing aspect of this proposal is its cost. It is my 
understanding that the President's proposal, if allowed to reach its 
fullest potential, will exceed $80 billion over the next 10 years as 
estimated by Joint Tax Committee. This contrasts with the modest tax 
package included in S. 1, which is estimated to cost $18 billion during 
the same period. This can be compared with the $1.6 million cost 
associated with the College Savings Act I have introduced today.
  The administration has been quick to point out that their tax package 
isn't a budget buster because of the tax credit sunset that will be 
implemented if the President's budget isn't in balance by 2002. 
According to the CBO the President's budget will run a $69 billion 
deficit in 2002. With such uncertainty, how does this help families 
plan for their childrens' future? Considering the importance of this 
issue, I am surprised the President is willing to allow this program to 
expire, shortly after it begins.
  The President's proposal has also been criticized because it will 
also contribute to increased tuition costs. Mr. Chairman, I would ask 
that an editorial by Lawrence Gladieux, executive director for the 
College Board and Robert Reischauer, the former director of the CBO, be 
included with my testimony.
  Mr. Gladieux and Mr. Reischauer argue that the President's credit 
would be money in the bank, not only for parents, but the schools as 
well. This across-the-board tax credit would permit schools to add this 
subsidy into the cost of tuition. It was also their assumption that the 
tax benefit would benefit primarily wealthy individuals. Therefore the 
President's package would be two strikes against low-income families 
who won't benefit from the tax credit, yet will still bear the burden 
of higher tuition costs.
  The authors also point out the President's proposal imposes a new 
regulatory burden on schools by requiring the IRS to verify that a 
student received a B average in order to be eligible for a second year 
of this tax credit. Under the President's proposal we will have the IRS 
grading student papers and publishing tax regulations defining B work. 
It is simply a mistake to use the Tax Code in this manner.
  It is in our best interest as a nation to maintain a quality and 
affordable education system for everyone. We need to decide on how we 
will spend our limited Federal resources to ensure that both access and 
quality are maintained. It is unrealistic to assume that the Government 
can afford to provide Federal assistance for everyone. However, at a 
modest cost, we can help families help themselves by rewarding savings. 
This reduces the cost of education and will not unnecessarily burden 
future generations with thousands of dollars in loans.
  I urge my colleagues to support this valuable legislation this year 
to reward those who save in order to provide a college education for 
their children.
  Mr. President, I ask the full text of the bill be printed in the 
Record. I also ask that the article by Larry Gladieux and Robert 
Reischauer be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 594

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

     SECTION 1. MODIFICATIONS OF TAX TREATMENT OF QUALIFIED STATE 
                   TUITION PROGRAMS.

       (a) Exclusion of Distributions Used for Educational 
     Purposes.--Subparagraph (B) of section 529(c)(3) of the 
     Internal Revenue Code of 1986 (relating to treatment of 
     distributions) is amended to read as follows:
       ``(B) Distributions for qualified higher education 
     expenses.--Subparagraph (A) shall not apply to any 
     distribution to the extent--
       ``(i) the distribution is used exclusively to pay qualified 
     higher education expenses of the distributee, or
       ``(ii) the distribution consists of providing a benefit to 
     the distributee which, if paid for by the distributee, would 
     constitute payment of a qualified higher education expense.''
       (b) Qualified Higher Education Expenses to Include Room and 
     Board.--Section 529(e)(3) of the Internal Revenue Code of 
     1986 (defining qualified higher education expenses) is 
     amended by adding at the end the following: ``Such term shall 
     also include reasonable costs (as determined under the 
     qualified State tuition program) incurred by the designated 
     beneficiary for room and board while attending such 
     institution.''
       (c) Additional Modifications.--
       (1) Member of family.--Paragraph (2) of section 529(e) of 
     the Internal Revenue Code of 1986 (relating to other 
     definitions and special rules) is amended to read as follows:
       ``(2) Member of family.--The term `member of family' 
     means--
       ``(A) an individual who bears a relationship to another 
     individual which is a relationship described in paragraphs 
     (1) through (8) of section 152(a), and
       ``(B) a spouse of any individual described in subparagraph 
     (A).''
       (2) Eligible educational institution.--Section 529(e) of 
     such Code is amended--
       (A) in paragraph (3), by striking ``(as defined in section 
     135(c)(3))'' and inserting ``(within the meaning of paragraph 
     (5))'', and
       (B) by adding at the end the following:
       ``(5) Eligible educational institution.--The term `eligible 
     educational institution' 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 paragraph, and
       ``(B) which is eligible to participate in a program under 
     title IV of such Act.''
       (3) Technical amendments.--
       (A) Subparagraph (B) of section 529(e)(1) of such Code is 
     amended by striking ``subsection (c)(2)(C)'' and inserting 
     ``subsection (c)(3)(C)''.
       (B) Subparagraph (C) of section 529(e)(1) of such Code is 
     amended by inserting ``(or agency or instrumentality 
     thereof)'' after ``State or local government''.
       (C) Paragraph (2) of section 1806(c) of the Small Business 
     Job Protection Act of 1996 is amended by striking so much of 
     the first sentence as follows subparagraph (B)(ii) and 
     inserting the following:

     ``then such program (as in effect on August 20, 1996) shall 
     be treated as a qualified State tuition program with respect 
     to contributions (and earnings allocable thereto) pursuant to 
     contracts entered into under such program before the first 
     date on which such program meets such requirements 
     (determined without regard to this paragraph) and the 
     provisions of such program (as so in effect) shall apply in 
     lieu of section 529(b) of the Internal Revenue Code of 1986 
     with respect to such contributions and earnings.''
       (d) Coordination With Education Savings Bond.--Section 
     135(c)(2) of the Internal Revenue Code of 1986 (defining 
     qualified higher education expenses) is amended by adding at 
     the end the following:
       ``(C) Contributions to qualified state tuition program.--
     Such term shall include any contribution to a qualified State 
     tuition program (as defined in section 529) on behalf of a 
     designated beneficiary (as so defined) who is an individual 
     described in subparagraph (A).''
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 1996.
       (2) Additional modifications.--The amendments made by 
     subsection (c) shall take effect as if included in the 
     amendments made by, and the provisions of, section 1806 of 
     the Small Business Job Protection Act of 1996.
                                                                    ____


               [From the Washington Post, Sept. 4, 1996]

                  Higher Tuition, More Grade Inflation

           (By Lawrence E. Gladieux and Robert D. Reischauer)

       More than any president since Lyndon Johnson, Bill Clinton 
     has linked his presidency to strengthening and broadening 
     American education. He has argued persuasively that the 
     nation needs to increase its investment in education to spur 
     economic growth, expand opportunity and reduce growing income 
     disparities. He has certainly earned the right to try to make 
     education work for him as an issue in his reelection 
     campaign, and that's clearly what he plans to do.
       Unfortunately, one way the president has chosen to pursue 
     his goals for education is by competing with the GOP on tax 
     cuts. The centerpiece of his education agenda--tax breaks for 
     families paying college tuition--would be bad tax policy and 
     worse education policy. While tuition tax relief may be 
     wildly popular with voters and leave Republicans speechless, 
     it won't achieve the president's worthy objectives for 
     education, won't help those most in need and will create more 
     problems than it solves.
       Under the president's plan, families could choose to deduct 
     up to $10,000 in tuition from their taxable income or take a 
     tax credit (a direct offset against federal income tax) of 
     $1,500 for the first year of undergraduate education or 
     training. The credit would be available for a second year if 
     the student maintains a B average.
       The vast majority of taxpayers who incur tuition expenses--
     joint filers with incomes up to $100,000 and single filers up 
     to $70,000--would be eligible for these tax breaks. But 
     before the nation invests the $43 billion that the 
     administration says this plan will cost over the next six 
     years, the public should demand that policy makers answer 
     these questions:

[[Page S3284]]

       Will tuition tax credits and deductions boost postsecondary 
     enrollment? Not significantly. Most of the benefits would go 
     to families of students who would have attended college 
     anyway. For them, it will be a windfall. That won't lift the 
     country's net investment in education or widen opportunities 
     for higher education. For families who don't have quite 
     enough to send their child to college, the tax relief may 
     come too late to make a difference. While those families 
     could adjust their payroll withholding, most won't. Thus any 
     relief would be realized in year-end tax refunds, long after 
     families needed the money to pay the tuition.
       Will they help moderate- and low-income students who have 
     the most difficulty meeting tuition costs? A tax deduction 
     would be of no use to those without taxable income. On the 
     other hand, the proposed $1,500 tax credit--because it would 
     be ``refundable''--would benefit even students and families 
     that owe no taxes. But nearly 4 million low-income students 
     would largely be excluded from the tax credit because they 
     receive Pell Grants which, under the Clinton plan, would be 
     subtracted from their tax-credit eligibility.
       Will the plan lead to greater federal intrusion into higher 
     education? The Internal Revenue Service would have to certify 
     the amount of tuition students actually paid, the size of 
     their Pell Grants and whether they maintained B averages. 
     This could impose complex regulatory burdens on universities 
     and further complicate the tax code. It's no wonder the 
     Treasury Department has long resisted proposals for tuition 
     tax breaks.
       Will the program encourage still higher tuition levels and 
     more grade inflation? While the tuition spiral may be 
     moderating slightly, college price increases have averaged 
     more than twice the rate of inflation during the 1990s. With 
     the vast majority of students receiving tax relief, colleges 
     might have less incentive to hold down their tuition 
     increases. Grades, which have been rising almost as rapidly 
     as tuition, might get an extra boost too if professors 
     hesitate to deny their students the B needed to renew the tax 
     credit.
       If more than $40 billion in new resources really can be 
     found to expand access to higher education, is this the best 
     way to invest it? A far better alternative to tuition tax 
     schemes is need-based student financial aid. The existing aid 
     programs, imperfect as they may be, are a much more effective 
     way to equalize educational opportunity and increase 
     enrollment rates. More than $40 billion could go a long way 
     toward restoring the purchasing power of Pell Grants and 
     other proven programs, whose benefits inflation has eroded by 
     as much as 50 percent during the past 15 years. Unlike 
     tuition tax cuts, expanded need-based aid would not drag the 
     IRS into the process of delivering educational benefits. 
     Need-based aid also is less likely to increase inflationary 
     pressure on college prices, because such aid goes to only a 
     portion of the college-going population.
       Economists have long argued that the tax code shouldn't be 
     used if the same objective can be met through a direct-
     expenditure program. Tax incentives for college savings might 
     make sense; parents seem to need more encouragement to put 
     money away for their children's education. But tax relief for 
     current tuition expenditures fails the test.
       Maybe Clinton's tuition tax-relief plan, like the 
     Republican across-the-board tax-cut proposals, can be chalked 
     up to election-year pandering that will be forgotten after 
     November. But oft-repeated campaign themes sometimes make it 
     into the policy stream. That was the case in 1992, when 
     candidate Clinton promised student-loan reform and community 
     service that, as president, he turned into constructive 
     initiatives. If reelected, Clinton again may stick with his 
     campaign mantra. This time, it's tuition tax breaks. This 
     time, he shouldn't.

  Mr. McCONNELL. Mr. President, it does not take an economics professor 
to figure out that compound interest can either work for or against 
you. I would think that my colleagues would agree that middle-class 
Americans deserve to have their hard-earned dollars working for them 
instead of against them. The College Savings Act allows hard-working 
Americans to utilize this principle while saving for the college 
education of their children.
  Option 1 illustrates the average cost of using the Federal loan 
program to finance the average instate college tuition in the United 
States which is $10,540. Under the Federal loan program, middle-class 
Americans end up paying $120 per month after graduation to retire just 
the cost of higher education tuition and fees, not to mention room and 
boarding costs.
  These payments will continue for 120 months, or 10 years after 
receiving a diploma. Students end up repaying $14,400 on these loans. 
This means that they will end up paying $3,860 in interest to finance a 
college education. That is figured at a 6.5-percent interest rate.
  Option 2, on the other hand, figures in the same amount of tuition 
cost, $10,540, but that is where the similarities end. Under the 
College Savings Act, monthly deposits are half as expensive as loan 
payments under Federal loan programs. Your monthly deposit over the 
120-month, or 10-year period under our legislation would only be $58.
  Mr. President, this is possible because under the College Savings Act 
total payments are only $6,960. This is simply because you have 
compound interest of 6.5 percent working in your favor, instead of 
against you, to the tune of $3,580. That totals a whopping difference 
of $7,440 from Federal loan programs. That is almost half the cost of 
financing an education through Federal loans.
  Mr. GRAHAM. Mr. President, I wish to speak this afternoon about an 
initiative which has been designed to increase American's access to 
college education. Today, Senator McConnell and I, along with numerous 
cosponsors, are introducing the College Savings Act of 1997. This bill 
would clarify the tax treatment of State-sponsored prepaid college 
tuition and savings programs and would clarify them in a manner that 
will allow States flexibility to offer their citizens plans to pay for 
college on a tax-free basis.
  Why are we discussing these programs? We are discussing these State 
programs because they have flourished in the face of spiraling college 
costs. As shown on this chart, which was produced by the General 
Accounting Office, tuition at colleges and universities has increased 
234 percent since 1980. During the same period, the general rate of 
inflation has increased only 85 percent and household income has 
increased only 82 percent. There has been a growing gap between the 
cost of higher education, in terms of tuition, and the ability of 
families to support their children's desire to continue their education 
beyond high school.
  Higher education inflation has been almost triple the rate of general 
inflation and the increase in Americans' ability to pay for that higher 
education. The causes of this dramatic increase in tuition is the 
subject of a significant debate. But whether these increases are 
attributable to increased costs of colleges and universities, reduction 
in State funding for public institutions, or the increased value of a 
college education, the fact remains that affording a college education 
has become increasingly difficult for American families.
  Although the Federal Government has increased its aid to college 
students over the years, it is the States that have engineered 
innovative ways to help citizens afford college.
  One of the most innovative of those measures has been the prepaid 
college tuition plan. The first of these plans was adopted in Michigan 
in 1986. Since that first program was adopted, today 15 States have 
such prepaid college plans, and an additional 4 States have adopted 
plans which will be in effect by 1998.
  The States shown in green are those which currently offer plans. The 
four States shown in yellow will initiate their plans this year. All of 
the remaining States shown in red are currently considering legislation 
to establish a prepaid college tuition plan. From these State 
laboratories, two types of programs have emerged: prepaid tuition 
programs and savings programs.
  Under either of these two, a family pays money into a State fund. In 
future years, the funds which have been accumulating will be 
distributed to the college or university of the child's choice and the 
child's ability to secure admission under the academic standards of 
that institution.
  The State pools the funds from all participants, invests those funds 
in a manner that will match or exceed the rate of higher education 
inflation.
  Under a prepaid tuition plan, the State and the individual family 
enter into an advanced tuition payment contract naming a student as the 
beneficiary of the contract. The amount the family must pay depends on 
the number of years remaining before the student enrolls in college. In 
most States, purchasers can choose a lump-sum payment or installment 
payments. Twelve States currently follow this tuition model. Let me 
explain with an example.
  Today, if a Florida child is 7 years old and his family enrolls him 
in the Florida prepaid tuition plan, they can enter into a contract and 
pay a lump sum of $5,900. Then in the year 2008, when the child reaches 
the age of 18

[[Page S3285]]

and enrolls in college, the State will transfer the cost of tuition for 
120 credit hours of instruction which has a currently estimated value 
of $14,350 to the college or university the student chooses to attend.
  Under a State savings plan, individuals transfer money to a State 
trust which, in turn, invests the funds and guarantees a certain rate 
of return. Typically, the earnings on the account are exempt from State 
taxation. Three States follow the State savings fund model.
  One of the attributes of these programs is that just as States 
establish institutions of higher education to meet the educational 
needs of their States' citizens, each State program differs in its 
emphasis. As an example, the Alaska plan allows individuals to direct a 
portion of the State oil revenues to pay for their contracts. In 
Alabama, money can be used to take accredited college courses while a 
student is still attending high school. The Massachusetts plan allows 
nonresidents to enroll in its plan. Louisiana provides matching grants 
for certain low-income participants in its plan.
  The tax problem that lies before us today, Mr. President, is whether 
or not the student should be taxed when the student redeems the funds 
upon enrollment. Until 1996, the Federal tax treatment of these plans 
remained murky. In the spring of 1996, the Internal Revenue Service 
indicated its intent to tax families annually on the earnings of funds 
transferred to these State plans.
  I thought this was wrong, counterproductive and would discourage what 
has been a very positive commitment of American families to save for 
their children's college education. So I worked with Senators 
McConnell, Breaux, Shelby, and the leaders of the Senate Finance 
Committee to address the issue in the Small Business Job Protection Act 
of 1996. Provisions we developed were included in the bill that 
President Clinton ultimately signed into law.
  The four basic provisions in the 1996 reform were, first, any prepaid 
or savings entity established by the State is tax exempt. Two, the 
earnings on money transferred to these State programs are not taxed 
until distribution. Three, upon distribution, the appreciation on the 
contracts or accounts will be taxed to the student beneficiary over the 
time the student attends college. And fourth, these tax rules apply 
only to contracts and accounts used to fund the cost of tuition, fees, 
books, and required equipment.
  Mr. President, despite the fact I offered the proposal in the Finance 
Committee, I have always thought that the right answer was that 
participation in these programs should be 100 percent tax free. In 
other words, no taxation upon distribution unless the funds were used 
for purposes other than qualified educational purposes.
  The legislation that Senator McConnell and I are introducing today 
will amend section 529 of the Tax Code in two significant respects. 
First, the bill provides that if distributions from a State fund are 
used for qualified educational purposes, then there will be no taxation 
to the student. In other words, there would be no Federal income tax 
for participation in these State-sponsored programs.
  Second, the bill would expand the definition of qualified higher 
education expenses. Last year's legislation provided that tuition, 
books, fees and required equipment were tax exempt. Under the new 
proposal, we would also include the cost of room and board as qualified 
educational expenses.
  The bill also makes a number of technical and other changes to assure 
that States have sufficient flexibility to manage their successful 
programs. There are several policy-related questions in enacting this 
legislation, and I will turn to them in a minute. But before doing so, 
I would like to offer an example of the positive influence of these 
programs from my State of Florida.
  I would like, Mr. President, to introduce to you Sean and Patrick 
Gilliland who are in the gallery today. Sean and Patrick Gilliland are 
respectively a senior and junior at the University of Florida. In 1988, 
the first year the prepaid program was offered to Floridians, Mr. and 
Mrs. Gilliland purchased prepaid contracts for Sean and Patrick. Two 
years after purchasing the plan, Mr. Gilliland tragically died, 
unexpectedly leaving Mrs. Gilliland, Sean and Patrick with a single 
income.

  Mrs. Gilliland is a nurse. As a result of the change of income, she 
attests that without the foresight of having purchased a Florida 
prepaid college program for her two sons, she would not have been able 
to provide a college education for Sean and Patrick.
  Sean will graduate in 2 weeks from the University of Florida, 
majoring in business administration with an emphasis in Asian studies. 
Sean has applied for several overseas positions in Japan, Taiwan, and 
Korea, with hopes to enter the field of technology in the business 
world.
  Patrick is currently a junior at the University of Florida, the 
School of Health and Human Performance, majoring in exercise and sports 
science. He is a member of Golden Key National Honor Society. He also 
holds a dean's list grade point average. Patrick is looking forward to 
continuing his education in a graduate program to prepare him for a 
profession in cardiological rehabilitation. I wish to both of them the 
very best in their future endeavors.
  Sean and Patrick Gilliland exemplify the reasons that we need to 
encourage the expansion of these State-based prepaid college tuition 
programs. Let me outline several of the policy reasons why it is 
appropriate and urgent that Congress enact the legislation that we 
introduce today to clarify the Federal tax treatment of these programs.
  First, Congress needs to support State innovation. Here is an example 
of a national problem: how to deal with the escalating cost of higher 
education. The States have provided the energy to address that problem. 
During the late 1980's and early 1990's, with the Federal Government 
responding to spiraling college costs in an inadequate manner, States 
experimented and engineered these programs. The Federal Government 
should encourage the States by getting the Internal Revenue Service out 
of the way.
  Second, State plans increase college enrollment, especially among 
low- and moderate-income families. Experience demonstrates that the 
discipline and the security offered by these prepaid tuition plans 
provide the exact incentive that many families need to save for 
college.
  For example, in Florida, the median income of families with a college 
student is $50,000. This chart indicates, in ``Who goes to college in 
Florida,'' that 22 percent of the families who have children in our 
State college and university system have incomes of less than $30,000; 
26 percent between $30,000 and $50,000.
  On the question, ``Who buys contracts for Florida's prepaid college 
tuition program,'' we find that 8 percent are purchased by families 
with incomes of under $20,000; 17 percent by families between $20,000 
and $30,000; and 23 percent by families between $30,000 and $40,000; 
and 24 percent by families between $40,000 and $50,000. So almost 
three-quarters of those families who purchase contracts have an income 
which is at or below the median income of all students attending 
Florida's colleges and universities.
  This program is providing a powerful incentive for moderate- and low-
income Florida families to think about and prepare for their children's 
education.
  Third, State plans help prepare students psychologically. A family 
that regularly sets aside money for a child's college education 
converts the focus of their student child from, ``Will I be able to go 
to college,'' to ``Will I be sufficiently prepared to be admitted to 
college and which college do I wish to attend?''
  Fourth, savings is a far superior approach to financing higher 
education than incurring additional individual and family debt. A 
prepayment or a savings plan is better economically, both for the 
family and for the Nation. These programs can also boost the Nation's 
savings rate.
  For example, Virginia's program has just completed its inaugural 
enrollment. It signed contracts of over $200 million for Virginia 
families saving for their children's college education.
  Finally, an expansion of programs will promote downward pressure on 
tuition rates. Increased participation in State tuition programs not 
only will provide participants with a guaranteed hedge against 
education inflation, but

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it will also produce downward pressure on tuition rates for all 
students at all colleges. States sponsoring these programs, in essence, 
guarantee that if earnings on the funds do not exceed increases in 
tuition rates, then the State will fund the difference when the student 
enrolls in college. Thus, a State has an incentive to encourage cost 
efficiency throughout its State system. The pressure will also promote 
moderate tuition hikes at private schools which must compete with 
public colleges for students. This has been true in Florida.

  Since the inauguration of the Florida prepaid program in 1988, State 
tuition has risen by an average of 6 percent per year. That is 2 
percent less than the national average of 8 percent a year.
  You may say, Mr. President, that, well, 2 percent difference between 
a particular State's average annual rate of increase in tuition and 
what is the national average is not a significant amount. Let me put 
this in dollar terms.
  In 1988, the average tuition in the Nation was $1,827. In Florida, it 
was $1,163. That is a difference of $664.
  By last year, with the average annual increase of 8 percent, the 
national average for tuition at State universities had grown from 
$1,827 to $3,358. Florida's tuition increasing at 6 percent per year 
had gone from $1,163 to $1,888. That, Mr. President, is a difference of 
$1,470 per year between the cost of college education in Florida and 
the average for the Nation.
  I am not saying that Florida's tuition increases have been less than 
the national average solely because of the Florida prepaid program, but 
it has been a significant factor.
  We need to do everything we can to hold college costs in check. The 
expansion of these programs can make a noticeable contribution in that 
effort. And clarifying the tax consequences of participation will help 
to facilitate additional States beyond the current 19 who have or will 
have these programs and increase the number of participating families.
  Mr. President, I would like to particularly thank Senator McConnell 
for the leadership which he has displayed in making the College Savings 
Act of 1997 a reality.
  With enactment of this legislation, parents and children will be able 
to rest easier knowing that Congress has done the right thing by making 
a college education more accessible. I urge my colleagues in the Senate 
to join Senator McConnell and me to assure enactment of this important 
new opportunity for American families to save and plan for the college 
education of their children.
  Mr. WARNER. Mr. President, Virginians appreciate the value of 
education. The Commonwealth owes its economic success to a strong 
university system and an educated workforce. This commitment to 
education continues to fuel economic expansion, job growth, and rising 
incomes.
  Middle-class parents across the country recognize that education is 
the key to their childrens' success. But they often struggle to provide 
this education, as college tuition increases far outpace increases in 
personal income. Tuition savings programs help provide a solution.
  Virginia was the first State in the union to launch its program after 
the Small Business Protection Act was signed into law last August. This 
legislation builds on that success, by making investment earnings in 
qualifying State tuition plans entirely tax exempt and by expanding 
coverage. This bill will encourage more families to save more money for 
higher education.
  Virginia's prepaid tuition program is an overwhelming success. During 
the first 3-month enrollment period, over 16,000 children were enrolled 
in VPEP. The value of these contract total over $260 million, ranking 
Virginia fourth in the Nation among States with prepaid education 
programs. The Virginia Higher Education Tuition Trust Fund received 
over 85,000 telephone calls from around the State seeking information 
about the program. I want to commend Governor Allen for his leadership, 
as well as Diana Cantor, executive director of the trust fund, and her 
team for their tremendous efforts.
  As Virginians recognize by their overwhelming support of the state's 
plan, education is a critical component of future success. I am pleased 
to cosponsor this important legislation and I commend Virginia for 
taking the lead.
                                 ______