[Congressional Record Volume 145, Number 22 (Monday, February 8, 1999)]
[Senate]
[Pages S1368-S1370]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. McCONNELL (for himself, Mr. Graham, Mr. Bunning, Mr. Mack, 
        Mr. Breaux, Mr. DeWine, Mr. Smith of Oregon, Mr. Robb, Mr. 
        Lugar, Mr. Cochran, Ms. Landrieu, Mr. Murkowski, Mr. Stevens, 
        Mr. Coverdell, Mr. Warner, Mr. Smith of New Hampshire, Mr. 
        Bayh, Mr. Byrd, Mr. Specter, and Mr. Kerrey):
  S. 387. A bill to amend the Internal Revenue Code of 1986 to provide 
an exclusion from gross income for distributions from qualified State 
tuition programs which are used to pay education expenses; to the 
Committee on Finance.


                    educational savings legislation

 Mr. McCONNELL.  Mr. President, I come to the floor today to 
introduce legislation that addresses an important issue facing American 
families today--the education of their children. It is my long-held 
belief that we need to make a college education more affordable, and 
the legislation I am introducing today, the College Savings Act, will 
do just that by providing tax incentives to families who save for 
college.

  This legislation is a serious effort to reward long-term saving by 
making savings for education tax-free. It is important that we not 
forget that compounded interest cuts both ways. By saving, participants 
can keep pace, or even ahead of, tuition increases while putting a 
little away at a time. By borrowing, students bear added interest costs 
that add thousands to the total cost of tuition. Savings will have a 
positive impact, by reducing the need for students to borrow tens of 
thousands of dollars in student loans. This will help make need-based 
grants, which target low-income families, go much further.
  Mr. President, anyone with a child in college knows first-hand the 
expense of higher education. Throughout the 1990's, education costs 
have continually outstripped the gains in income. Tuition rates have 
now become the greatest obstacle students face in attending college. In 
fact, the astronomical increase in college costs has been well 
documented. According to a study conducted by the College Board, 
tuition and fees for a four-year public university rose 107 percent 
from 1980-1997, while median household income rose only 12 percent.
  Due to the high 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 utilize some amount of financial assistance. In 
1997-98, $60 billion in financial aid was available to students and 
their families from federal, state, and institutional sources. This was 
$3 billion higher than the previous year. A majority of this increase 
in aid was 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.
  We must reverse the dependence on federal assistance and encourage 
families to save. My legislation would reward savings and allow 
students and families that are participating in these state-sponsored 
plans to be exempt from federal income tax when the funds are used for 
qualified educational purposes. This legislation also recognizes the 
leadership that states have provided in helping families save for 
college. In the mid-1980s, states identified the difficulty families 
had in keeping pace with the rising cost of education. States like 
Kentucky, Florida, Ohio, and Michigan were the first to start programs 
in order to help families save for college. Nationwide more than 30 
states have established savings programs, and over a dozen states are 
preparing to implement plans in the near future. Today, there are 
nearly one million savers who have contributed over $3 billion in 
education savings. The provision which I authored, which allows tax-
free education savings in state-sponsored savings plans for education 
purposes, provides nearly a $1.5 billion tax break for middle-class 
savers nationwide. In Kentucky, over 3,720 families have established 
accounts, which amount to about $7.5 million in savings.
  Mr. President, I have worked closely with the state plan 
administrators over the years seeking both their advice and support. 
Again this year, I am pleased to have the National Association of State 
Treasurers and the College Savings Plans Network endorse this 
legislation. They have worked tirelessly in support of this legislation 
because they know it is in the best interest of plan participants--the 
families who care about their children's education.
  Mr. President, 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 $52. It is also 
important to note that 60 percent of the participants earn under 
$60,000 per year. By exempting all interest earnings from state taxes, 
my legislation rewards parents who are serious about their children's 
future and who are committed over the long-term to the education of 
their children by providing a significant tax break for middle-class 
savers nationwide. Clearly, this benefits middle-class families.
  In 1994, I introduced the first bill to make education savings exempt 
from taxation. Since then I have won a couple of battles, but still 
haven't won the war. To win the war, Congress needs to make education 
savings tax free--from start to finish. The bill I am introducing today 
will achieve that goal.
  In 1996, Congress took the first step in providing tax relief to 
families investing in these programs. In the Small Business Job 
Protection Act of 1996, I was able to include a provision that 
clarified the tax treatment of state-sponsored 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 trying to save for their 
children's education. Also in 1996, 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.
  In 1997, the Taxpayer Relief Act made revisions to provide maximized 
flexibility to families saving for their children's college education. 
The most significant reform was to expand the definition of ``qualified 
education costs'' to include room and board, thus doubling the amount 
families could save tax-free. In Kentucky, room and board at a public 
institution make up half of all college costs. This important 
legislation also expanded the definition of eligible institutions to 
include all schools, including certain proprietary schools, and defined 
the term ``member of family'' to allow rollover eligibility for cousins 
and step-siblings in the event that the original beneficiary does not 
attend college.
  Last year, the Senate passed legislation, sponsored by Senator 
Coverdell and Senator Torricelli, which would have allowed parents to 
place as much as $2,000 per year, per child, in an education savings 
account for kindergarten through high school education. Included in 
this legislation was my proposal to make savings in state-sponsored 
tuition plans tax-free. Unfortunately, the bill was vetoed by President 
Clinton.
  As a result of our actions over the last several years, more and more 
state plans have implemented tuition savings and prepaid plans for 
their residents. It is projected that there will be 43 states with 
tuition savings plans by the year 2000. I believe that we have a real 
opportunity to go even further toward making college affordable to 
American families. It is in our best interest as a nation to maintain a 
quality and affordable education system for everyone. By passing this 
legislation, we can help families help themselves by rewarding savings. 
This will reduce the cost of education and will not unnecessarily 
burden future generations with thousands of dollars in loans.
  Mr. President, I ask unanimous consent that a copy of the bill and 
letters endorsing my legislation from the Kentucky Higher Education 
Assistance Authority and the National Association of State Treasurers 
be printed in the

[[Page S1369]]

Record, along with an article from Time magazine that discusses the 
popularity of state tuition saving programs.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 387

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

     SECTION 1. EXCLUSION FROM GROSS INCOME OF EDUCATION 
                   DISTRIBUTIONS FROM QUALIFIED STATE TUITION 
                   PROGRAMS.

       (a) In General.--Section 529(c)(3)(B) of the Internal 
     Revenue Code of 1986 (relating to distributions) is amended 
     to read as follows:
       ``(B) Distributions for qualified higher education 
     expenses.--
       ``(i) In general.--No amount shall be includible in gross 
     income under subparagraph (A) if the qualified higher 
     education expenses of the designated beneficiary during the 
     taxable year are not less than the aggregate distributions 
     during the taxable year.
       ``(ii) Distributions in excess of expenses.--If such 
     aggregate distributions exceed such expenses during the 
     taxable year, the amount otherwise includible in gross income 
     under subparagraph (A) shall be reduced by the amount which 
     bears the same ratio to the amount so includible (without 
     regard to this subparagraph) as such expenses bear to such 
     aggregate distributions.
       ``(iii) Election to waive exclusion.--A taxpayer may elect 
     to waive the application of this subparagraph for any taxable 
     year.
       ``(iv) In-kind distributions.--Any benefit furnished to a 
     designated beneficiary under a qualified State tuition 
     program shall be treated as a distribution to the beneficiary 
     for purposes of this paragraph.
       ``(v) Disallowance of excluded amounts as credit or 
     deduction.--No deduction or credit shall be allowed to the 
     taxpayer under any other section of this chapter for any 
     qualified higher education expenses to the extent taken into 
     account in determining the amount of the exclusion under this 
     paragraph.''.
       (b) Coordination With Education Credits.--Section 25A(e)(2) 
     of the Internal Revenue Code of 1986 (relating to 
     coordination with exclusions) is amended--
       (1) by inserting ``a qualified State tuition program or'' 
     before ``an education individual retirement account''; and
       (2) by striking ``section 530(d)(2)'' and inserting 
     ``section 529(c)(3)(B) or 530(d)(2)''.
       (c) Coordination With Education Savings Bonds.--
     Subparagraph (B) of section 135(d)(2) of the Internal Revenue 
     Code of 1986 (relating to coordination with other higher 
     education benefits) is amended by striking ``section 
     530(d)(2)'' and inserting ``section 529(c)(3)(B) or 
     530(d)(2)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.
                                  ____

                                         Kentucky Higher Education


                                         Assistance Authority,

                                  Frankfort, KY, January 14, 1999.
     Hon. Mitch McConnell,
     U.S. Senate, Russell Office Building,
     Washington, DC.
       Dear Senator McConnell: Your tremendous support of the 
     Kentucky Educational Savings Plan Trust (Trust) has led to 
     more favorable federal tax treatment of this program and 
     other qualified state tuition programs (QSTPs) around the 
     country. The success achieved through your work provides 
     Kentucky families a greater opportunity to save for the 
     higher education costs of their children.
       I am writing to ask for your continued leadership on this 
     issue by pushing forward to obtain tax-free treatment for 
     amounts distributed from QSTPs to cover qualified higher 
     education expenses. Significant progress has been made in 
     this area during the past three years, and we believe your 
     continued efforts will achieve the final goal of tax-free 
     treatment.
       Currently, over 2,800 Kentucky families have saved over 
     $7.5 million dollars through the Trust for their children's 
     higher education. We greatly appreciate your efforts to help 
     Kentucky families save for higher education and look forward 
     to continuing to work with you and your staff on this 
     important initiative.
           Sincerely,
                                                   Paul P. Borden,
     Executive Director.
                                  ____



                                College Savings Plans Network,

                                                 February 4, 1999.
     Re college savings legislation.

     Hon. Mitch McConnell,
     U.S. Senate, Russell Senate Office Building, Washington, DC.
       Dear Senator McConnell: On behalf of the College Savings 
     Plans Network (``CSPN''), which represents the 44 states 
     currently offering and managing colleges savings programs, I 
     am writing to express our strong support for your legislation 
     to provide tax-free treatment for contributions to the 
     qualified state tuition programs. CSPN applauds your 
     leadership on legislation to encourage savings for college. 
     Currently, there are over 849,288 signed college tuition 
     contracts. The estimated fair market value of these contracts 
     if $4.2 billion. The families participating in the programs 
     appreciate your efforts on their behalf.
       The College Savings Plans Network embraces and fully 
     supports the intent of the College Savings Act of 1999. The 
     public policy intent of this proposal is to enable and 
     motivate families to save for college by providing clear and 
     easily understood tax treatment of the qualified state 
     tuition plans.
       CSPN greatly appreciates and fully supports the legislation 
     and your leadership on this proposal.
           Sincerely,
                                                 Marshall Bennett,
         Chairman, College Savings Plans Network, and Mississippi 
     State Treasurer.
                                  ____


                       [From Time, Dec. 7, 1998]

                      New Way to Save for College

         (Online advice from Time finance columnist Dan Kadlec)

       The best college-savings program you never heard about 
     keeps getting better. As you think about year-end tax moves, 
     consider dropping some cash into a state-sponsored plan where 
     money for college grows tax-deferred and may garner a fat 
     state income tax exemption as well. This plan is relatively 
     new and often gets confused with more common prepaid-tuition 
     plans, in which you pay today and attend later--removing 
     worries about higher tuition in the future. Savings plans are 
     vastly different and in most cases superior because they are 
     more flexible.
       Prepaid plans offer tax advantages, and some are portable, 
     but many still apply only to public colleges within the 
     taxpayer's state. What if Junior gets accepted to Harvard? 
     You can get your contributions back. But some states refund 
     only principal, beating you out of years' worth of investment 
     gains. And state prepaid plans make it tougher to get student 
     aid because the money is held in the student's name. With 
     savings plans the money is in a parent's name, where it 
     counts less heavily in student-aid formulas--and you can set 
     aside as much as $100,000 for expenses at any U.S. college.
       Both the prepaid and the college-savings plans vary from 
     state to state. Check out the website ``collegesaving.org'' 
     for details. It's a fast-moving area. In the next few months, 
     eight states will join the 15 that already have state 
     college-savings programs. Those are mostly in addition to the 
     19 that have prepaid-tuition plans. Only Massachusetts will 
     probably offer both.
       Most of the newer savings plans make contributions 
     deductible against state taxes. New York, for example, 
     launched its plan two months ago. It permits couples to set 
     aside up to $10,000 a year per student and lets New York 
     residents deduct the full amount from their income on their 
     state return. Missouri will approve a tax-deductible savings 
     plan in December. Minnesota is expected to adopt a plan in 
     which the state matches 5% of your contributions. These 
     college-savings plans are open to everyone, regardless of 
     income--in contract to the Roth IRA and other federal savings 
     plans, in which eligibility begins to phase out for couples 
     earning more than $100,000.
       If your state doesn't offer a college-savings plan, you can 
     still participate through an out-of-state plan. You won't get 
     the state tax deduction, but you will get tax-deferred 
     investment growth; and when the money is tapped, it will be 
     taxed at the student's rate (usually 15%). Fidelity 
     Investments (800-544-1722), which runs the New Hampshire 
     savings plan, and TIAA-CREF (877-697-2337; www.nysaves.org), 
     which runs the New York plan, make it easy. If your state 
     later offers a savings plan with a tax deduction, you can 
     transfer your account penalty free.
       Both plans invest mostly in stocks in the early years and 
     slowly shift into bonds and money markets as your student 
     nears college age. You get no say in this allocation. The 
     impact of tax deferral is big. TIAA-CREF estimates that 
     someone in the 28% tax bracket saving $5,000 a year and 
     mimicking its investments in a taxable account could expect 
     to accumulate $167,000 in 18 years.
       Deferring taxes and then paying them at 15% brings the 
     total to $190,000. The state deduction, for those who 
     qualify, pushes the nest egg to $202,000.
       Plan benefits:
       Taxes are deferred and then paid at the child's lower rate;
       Families are eligible regardless of income or state of 
     residence; and
       Tax deductions are increasingly available on state 
     returns.
 Mr. GRAHAM. Mr. President, I am proud to join Senator 
McConnell and other colleagues in launching an initiative to increase 
Americans' access to college education. Today we are introducing the 
College Savings Act of 1999. This bill would allow states to offer 
prepaid college tuition and savings programs on a tax exempt basis.
  These programs have flourished in the face of spiraling college 
costs. According to the College Board, between 1980 and 1997, tuition 
at public colleges increased 107 percent, while the median income 
increased just 12 percent. The cause of this dramatic increase in 
tuition is the subject of significant debate. But whether these 
increases are attributable to increased costs to the universities, 
reductions in state funding for public universities, or the increased 
value of a college degree, the fact remains that financing a college 
education has become increasingly difficult.

[[Page S1370]]

  Although the federal government has increased its aid to college 
students over the years, it is the states who have engineered 
innovative ways to help its families afford college. Michigan 
implemented the first prepaid tuition plan in 1986. Florida followed in 
1988. Today 43 states have either implemented or are in the process of 
implementing prepaid tuition plans or state savings plans.
  Mr. President, prepaid college tuition plans allow parents to pay 
prospectively for their children's higher education at participating 
universities. States pool these funds and invest them in a manner that 
will match or exceed the pace of educational inflation. This ``locks 
in'' current tuition prices and guarantees financial access to a future 
college education.
  Prior to 1996, the IRS had indicated that it would treat the state 
entity that held and invested the funds as a taxable corporation. In 
addition, the IRS stated its intent to tax families annually on 
earnings on amounts transferred to a state program. In the Small 
Business Jobs protection Act, The 104th Congress did two things: (1) it 
said that provided the program met certain standards, the state program 
would be tax exempt. (2) Congress also said that families could not be 
taxed on earnings on an account until a distribution is made from the 
state plan to the family or the applicable college. At that point, 
student beneficiary could be taxed on the earnings.
  The following year, in the Taxpayer Relief Act, The 105th Congress 
clarified that this deferral of taxation applied not only to prepaid 
tuition but also to prospective payments for room and board.
  Senator McConnell and I believe that The 106th Congress must go one 
step further. Distributions from these accounts should be 100 percent 
tax free. Students should be able to enroll in college without fear of 
them having to pay taxes on the money accrued.
  We believe that these programs should be tax free for numerous 
reasons. First, for most families, they have in essence purchased a 
service to be provided in the future. The accounts are not liquid. The 
funds are transferred from the state directly to the college or 
university. Under current policy, the student is required to find other 
means of generating the funds to pay the tax. Second, Congress should 
make these programs tax free in order to encourage savings and college 
attendance. No longer is a student's question ``Will I be able to go to 
college?'' but instead ``Where will I go to college?'' Third, making 
these accounts tax free is good education fiscal policy. For states 
that do set up programs where they guarantee a tuition price by selling 
contracts, the existence of these programs puts downward pressure on 
education inflation.
  Perhaps most importantly, prepaid tuition and savings programs help 
middle income families afford a college education. Florida's experience 
shows that it is not higher income families who take most advantage of 
these plans. It is middle income families who want the discipline of 
monthly payments. They know that they would have a difficult time 
coming up with the funds necessary to pay for college if they waited 
until their child enrolled. In Florida, more than 70 percent of 
participants in the state tuition program have family incomes of less 
than $50,000.
  I am pleased to have this opportunity to join my colleagues in 
support of good tax policies which enhance our higher education goals. 
Prepaid tuition plans deserve our support through enactment of 
legislation that would make them tax-free for American families and 
students.
                                 ______