[Congressional Record Volume 147, Number 21 (Wednesday, February 14, 2001)]
[Senate]
[Pages S1416-S1420]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. McConnell (for himself, Mr. Graham, Mr. Bunning, Mr. 
        DeWine, Mr. Warner, and Mr. Lugar):
  S. 335. 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, and for 
other purposes; to the Committee on Finance.
  Mr. McCONNELL. Mr. President, today I am once again honored to 
introduce a bill which focuses on an important issue facing American 
families today--paying for the education of their children. I have long 
believed that we need to make college education more affordable, and my 
legislation, the Setting Aside for a Valuable Education, or SAVE, Act, 
will do that by making savings in qualified tuition savings plans 
entirely tax-free. I am pleased to be joined in this endeavor by the 
bill's original co-sponsors, Senators Graham, Bunning, DeWine, Warner, 
and Lugar.
  I have worked for the past six years to make saving for college 
easier for American families by providing ways to help them keep pace 
with the rising cost of a college education through tax incentives. In 
1994, I introduced the first bill to make education savings in state 
tuition plans exempt from taxation. Since that time, Congress has made 
significant progress toward achieving this important goal.
  In 1996, I was able to include a provision in the Small Business Job 
Protection Act that clarified the tax treatment of state-sponsored 
savings plans and the participants' investment. This measure 
established that account earnings on the savings plans are to be 
included in gross income when distributions to attend school are made. 
This was an important change because it removed the tax uncertainty 
that was hindering the plans' effectiveness and helped families who are 
trying to save for their children's future education needs. Before this 
clarification, it appeared that account earnings may be taxed annually, 
which would have deterred saving for education expenses. Also, my 
language shifted the tax burden upon distribution of the funds from the 
parent to the student, who is generally taxed at a lower rate.
  The following year, the Taxpayer Relief Act of 1997 included several 
important legislative initiatives that maximized flexibility to 
families with investments in long-term education savings plans. Through 
this vehicle, I was pleased to be able to expand the definition of 
``eligible education expenses'' to include room and board costs so that 
these expenses--often as much as one-half the entire cost of college--
also received the deferred tax treatment. Secondly, I was able to 
include a provision which expanded the definition of ``eligible 
institutions'' to include all schools, including certain proprietary 
schools, which are eligible under the Department of Education's student 
aid program. Finally, I was pleased that the Taxpayer Relief Act 
included a more detailed definition of the term ``member of family'' to 
allow tax-free transfers of credits or account balances in a qualified 
tuition program to additional family members in the event that the 
named beneficiary does not attend college.
  However, while I am proud of these initial success stories, I will 
continue to press to make education savings entirely tax free. While 
the end is in

[[Page S1418]]

sight, we cannot claim victory until we achieve this goal. In fact, the 
need for education savings tax relief is more acute then ever as recent 
studies demonstrate that we must continue to encourage parents to adopt 
a long-term savings approach for their children's future education.
  According to the College Board, during the 2000-2001 academic school 
year, the average tuition at four-year public colleges rose between 4.4 
and 5.2 percent. It is important to note that this increase was higher 
than the 1999 tuition increase of 3.4 percent. In addition, the College 
Board estimates that room and board charges will increase between 4 and 
5 percent for next year. What is most frustrating is that despite the 
recent economic boom, the cost of a college education continues to rise 
at a rate faster than many families can afford. According to the 
College Board, since 1980 the price of a college education has been 
rising between two and three times the Consumer Price Index. In fact, 
tuition and fees for a four year college education has risen 115 
percent over inflation since the 1980-81 school year, while median 
household income has risen only 20 percent. Over the past decade, 
tuition has increased between 32 and 49 percent, while family income 
over the same period has increased just 4 percent.
  As a result, more and more families are forced to rely on financial 
aid to meet tuition costs. In fact, a majority of all college students 
utilize some amount of financial assistance. The amount of financial 
aid available to students and their families for the 1999-2000 school 
year topped $68 billion, more than 4% above than the previous year. 
However, there has been a marked trend from grant-based assistance 
programs to loan-based assistance programs, and today many students are 
forced to borrow in order to attend college. This shift toward loans 
increases the financial burden of attending college because students 
and families must then assume interest costs that can add thousands to 
the total cost of tuition.
  We must not forget that compounded interest cuts both ways. For those 
students who must borrow, compounded interest is a burden, for those 
students and families who save, it is a blessing. By saving, 
participants can keep pace, or even ahead of, tuition increases. By 
borrowing, students bear additional interest costs that add thousands 
to the total cost of tuition. Savings 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, better meet the demands of those who are in most 
need.
  Mr. President, the need for rewarding long-term saving for college is 
clear. My legislation will recognize and award savings while allowing 
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 bill will finish what I started in 
1994.
  Mr. President, as a result of our actions over the last several 
years, a majority of the states have implemented tuition savings plans 
for their residents. In the mid-1980s, states first began to recognize 
the difficulty that families faced in keeping pace with the rising cost 
of education. States like Kentucky, Florida, Ohio, and Michigan were 
among the first to start programs aimed at helping families save for 
their children's college education. Other states have since followed 
suit, and currently 48 states have some form of tuition savings plans.
  Today, there are nearly one million savers who have contributed over 
$2 billion in education savings. In the Commonwealth of Kentucky alone, 
3,250 beneficiaries have active accounts and have accumulated $13 
million in savings. With average monthly contributions as low as $110, 
and nearly 60% of the participating families earning a household income 
of under $60,000 annually, state-sponsored tuition plans clearly 
benefit middle-class families--the exact Americans who deserve and need 
such relief.
  In addition to accomplishing my long-sought goal of making savings in 
tuition savings plans entirely tax-free, the SAVE Act, includes several 
other new provisions. It allows private institutions to establish their 
own qualified prepaid tuition programs, and at the same time includes 
important consumer protections to ensure that these new plans operate 
in a fiscally responsible manner. The SAVE Act also modifies the cap on 
room and board expenses to more accurately reflect the cost of 
attending an institution of higher learning. The final important change 
made in the SAVE Act is a provision allowing for one annual rollover 
between Section 529 plans to meet the needs of our increasingly mobile 
society.
  I have worked closely with state plan administrators over the years 
seeking both their advice and support. When I introduce the SAVE Act 
this afternoon, I will be honored once again to have the endorsement of 
the National Association of State Treasurers and the College Savings 
Plans Network (CSPN). I ask unanimous consent that CSPN's letter of 
support be included in the record. They have worked tirelessly in 
support of this legislation because they know it is in the best 
interests of plan participants--families who care about their 
children's education. In addition, state-sponsored tuition savings 
plans have recently been touted as one of the best ways to save for a 
college education by such influential magazines as Money, Fortune, and 
Business Week.
  This overwhelming support for these programs underscores my belief 
that we have a real opportunity to go even further toward making 
college affordable for American families. It is in our national 
interest to maintain a quality and affordable education system for all 
families--not merely those fortunate to have the resources. 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 all savers 
nationwide. This will reduce the cost of education and will not 
unnecessarily burden future generations with thousands of dollars in 
loans.
  College is a lifelong investment. We must take steps to ensure that 
higher education is within the reach of every child so that they are 
prepared to meet the challenges they will face in our increasingly 
competitive world. We must make it easier for families to save for 
college, and we can do so this year by providing total tax freedom for 
education savings. My bill will make these tuition savings plans 
entirely tax-free when the money is drawn out to pay for college, and I 
believe that my legislation is the best approach to ensuring that our 
children can obtain a higher education without mortgaging their 
futures.
  Mr. President, I appreciate the opportunity to speak to the Senate on 
this legislation and I look forward to working with the bill's co-
sponsors and the Bush Administration to enact it into law.
  I ask unanimous consent that the bill and a letter be printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 335

       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 ``Setting Aside for a Valuable 
     Education (SAVE) Act''.

     SEC. 2. EXCLUSION FROM GROSS INCOME OF EDUCATION 
                   DISTRIBUTIONS FROM QUALIFIED STATE TUITION 
                   PROGRAMS.

       (a) In General.--Subparagraph (B) of section 529(c)(3) of 
     the Internal Revenue Code of 1986 (relating to distributions) 
     is amended to read as follows:
       ``(B) Distributions for qualified higher education 
     expenses.--For purposes of this paragraph--
       ``(i) In-kind distributions.--No amount shall be includible 
     in gross income under subparagraph (A) by reason of a 
     distribution which consists of providing a benefit to the 
     distributee which, if paid for by the distributee, would 
     constitute payment of a qualified higher education expense.
       ``(ii) Cash distributions.--In the case of distributions 
     not described in clause (i), if--

       ``(I) such distributions do not exceed the qualified higher 
     education expenses (reduced by expenses described in clause 
     (i)), no amount shall be includible in gross income, and
       ``(II) in any other case, the amount otherwise includible 
     in gross income shall be reduced by an amount which bears the 
     same ratio to such amount as such expenses bear to such 
     distributions.

       ``(iii) Exception for institutional programs.--In the case 
     of any taxable year beginning before January 1, 2004, clauses 
     (i)

[[Page S1419]]

     and (ii) shall not apply with respect to any distribution 
     during such taxable year under a qualified State tuition 
     program established and maintained by 1 or more eligible 
     educational institutions.
       ``(iv) Treatment as 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) Coordination with hope and lifetime learning 
     credits.--The total amount of qualified higher education 
     expenses with respect to an individual for the taxable year 
     shall be reduced--

       ``(I) as provided in section 25A(g)(2), and
       ``(II) by the amount of such expenses which were taken into 
     account in determining the credit allowed to the taxpayer or 
     any other person under section 25A.

       ``(vi) Coordination with education savings accounts.--If, 
     with respect to an individual for any taxable year--

       ``(I) the aggregate distributions to which clauses (i) and 
     (ii) and section 530(d)(2)(A) apply, exceed
       ``(II) the total amount of qualified higher education 
     expenses otherwise taken into account under clauses (i) and 
     (ii) (after the application of clause (iv)) for such year,

     the taxpayer shall allocate such expenses among such 
     distributions for purposes of determining the amount of the 
     exclusion under clauses (i) and (ii) and section 
     530(d)(2)(A).''.
       (b) Conforming Amendments.--
       (1) Section 135(d)(2)(B) of the Internal Revenue Code of 
     1986 is amended by striking ``section 530(d)(2)'' and 
     inserting ``sections 529(c)(3)(B)(i) and 530(d)(2)''.
       (2) Section 221(e)(2)(A) of such Code is amended by 
     inserting ``529,'' after ``135,''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 3. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO 
                   MAINTAIN QUALIFIED TUITION PROGRAMS.

       (a) In General.--Section 529(b)(1) of the Internal Revenue 
     Code of 1986 (defining qualified State tuition program) is 
     amended by inserting ``or by 1 or more eligible educational 
     institutions'' after ``maintained by a State or agency or 
     instrumentality thereof''.
       (b) Private Qualified Tuition Programs Limited To Benefit 
     Plans.--Clause (ii) of section 529(b)(1)(A) of the Internal 
     Revenue Code of 1986 is amended by inserting ``in the case of 
     a program established and maintained by a State or agency or 
     instrumentality thereof,'' before ``may make''.
       (c) Additional Requirements for Certain Private Qualified 
     Tuition Programs.--Section 529(b) of the Internal Revenue 
     Code of 1986 is amended by adding at the end the following 
     new paragraph:
       ``(8) Additional requirements for certain private qualified 
     tuition programs.--A program established and maintained by 1 
     or more eligible educational institutions and described in 
     paragraph (1)(A)(ii) shall not be treated as a qualified 
     tuition program unless--
       ``(A) under such program a trust is created or organized 
     for the sole purpose of paying the qualified higher education 
     expenses of the designated beneficiary of the account,
       ``(B) the written governing instrument creating the trust 
     of which the account is a part provides safeguards to ensure 
     that contributions made on behalf of a designated beneficiary 
     remain available to provide for the qualified higher 
     education expenses of the designated beneficiary, and
       ``(C) the trust meets the following requirements:
       ``(i) Any trustee or person who may under contract operate 
     or manage the trust demonstrates to the satisfaction of the 
     Secretary that the manner in which that trustee or person 
     will administer the trust will be consistent with the 
     requirements of this section.
       ``(ii) The assets of the trust are not commingled with 
     other property except in a common trust fund or common 
     investment fund.
       ``(iii) The trust annually prepares and makes available the 
     reports and accountings required by this section. The annual 
     report, at a minimum, includes information on the financial 
     condition of the trust and the investment policy of the 
     trust.
       ``(iv) Before entering into contracts or otherwise 
     accepting contributions on behalf of a designated 
     beneficiary, the trust obtains an appropriate actuarial 
     report to establish, maintain, and certify that the trust 
     shall have sufficient assets to defray the obligations of the 
     trust and annually makes the actuarial report available to 
     account contributors and designated beneficiaries.
       ``(v) The trust secures a favorable ruling or opinion 
     issued by the Internal Revenue Service that the trust is in 
     compliance with the requirements of this section.
       ``(vi) Before entering into contracts or otherwise 
     accepting contributions on behalf of a designated 
     beneficiary, the trust solicits answers to appropriate ruling 
     requests from the Securities and Exchange Commission 
     regarding the application of Federal securities laws to the 
     trust.''.
       (d) Application of Federal Securities Laws to Private 
     Qualified Tuition Programs.--Section 529(e) of the Internal 
     Revenue Code of 1986 (relating to other definitions and 
     special rules) is amended by adding at the end the following 
     new paragraph:
       ``(6) Application of federal securities laws to private 
     qualified tuition programs.--Nothing in this section shall be 
     construed to exempt any qualified tuition program that is not 
     established and maintained by a State or agency or 
     instrumentality thereof from any of the requirements of the 
     Securities Act of 1933 (15 U.S.C 77a et seq.) or the 
     Investment Company Act of 1940 (15 U.S.C 80a-1 et seq.).''.
       (e) Conforming Amendments.--
       (1) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529, 
     530(b)(2)(B), 4973(e), and 6693(a)(2)(C) of the Internal 
     Revenue Code of 1986 are each amended by striking ``qualified 
     State tuition'' each place it appears and inserting 
     ``qualified tuition''.
       (2) The headings for sections 72(e)(9) and 135(c)(2)(C) of 
     such Code are each amended by striking ``qualified state 
     tuition'' and inserting ``qualified tuition''.
       (3) The headings for sections 529(b) and 530(b)(2)(B) of 
     such Code are each amended by striking ``Qualified state 
     tuition'' and inserting ``Qualified tuition''.
       (4) The heading for section 529 of such Code is amended by 
     striking ``state''.
       (5) The item relating to section 529 of such Code in the 
     table of sections for part VIII of subchapter F of chapter 1 
     is amended by striking ``State''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 4. OTHER MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

       (a) Rollover to Different Program for Benefit of Same 
     Designated Beneficiary.--Section 529(c)(3)(C) of the Internal 
     Revenue Code of 1986 (relating to change in beneficiaries) is 
     amended--
       (1) by striking ``transferred to the credit'' in clause (i) 
     and inserting ``transferred--

       ``(I) to another qualified tuition program for the benefit 
     of the designated beneficiary, or
       ``(II) to the credit'',

       (2) by adding at the end the following new clause:
       ``(iii) Limitation on certain rollovers.--Clause (i)(I) 
     shall only apply to 1 transfer with respect to a designated 
     beneficiary in any year.'', and
       (3) by inserting ``or programs'' after ``beneficiaries'' in 
     the heading.
       (b) Member of Family Includes First Cousin.--Section 
     529(e)(2) of the Internal Revenue Code of 1986 (defining 
     member of family) is amended by striking ``and'' at the end 
     of subparagraph (B), by striking the period at the end of 
     subparagraph (C) and by inserting ``; and'', and by adding at 
     the end the following new subparagraph:
       ``(D) any first cousin of such beneficiary.''.
       (c) Adjustment of Limitation on Room and Board 
     Distributions.--Section 529(e)(3)(B)(ii) of the Internal 
     Revenue Code of 1986 is amended to read as follows:
       ``(ii) Limitation.--The amount treated as qualified higher 
     education expenses by reason of clause (i) shall not exceed 
     the greater of--

       ``(I) the amount (applicable to the student) included for 
     room and board for such period in the cost of attendance (as 
     defined in section 472 of the Higher Education Act of 1965 
     (20 U.S.C. 1087ll), as in effect on the date of the enactment 
     of the Setting Aside for a Valuable Education (SAVE) Act) for 
     the eligible educational institution for such period, or
       ``(II) the actual invoice amount the student residing in 
     housing owned or operated by the eligible educational 
     institution is charged by such institution for room and board 
     costs for such period.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.
                                  ____



                                College Savings Plans Network,

                                 Lexington, KY, February 13, 2001.
     Re College Savings Plans Network's Support of the SAVE Act

     Hon. Mitch McConnell,
     U.S. Senate, Russell Senate Office Building, Washington, DC.
       Dear Senator McConnell: Thank you for your continued 
     support of legislation to encourage college savings through 
     state-sponsored college savings programs. Your leadership in 
     helping families plan for their children's college education 
     is truly commendable; your foresight and knowledge have 
     enhanced the ability of all families to save. Section 529 
     programs now represent over 1.4 million families who have 
     invested more than $8 billion for their children's future 
     higher education. The College Savings Plans Network 
     represents all 50 states that are currently operating or 
     developing Sec. 529 college savings programs.
       In our continuing efforts to make a college education more 
     accessible and affordable for American families, we are very 
     appreciative of your sponsorship of the ``Setting Aside for a 
     Valuable Education (SAVE) Act,'' which would provide an 
     exclusion from gross income for earnings on Sec. 529 
     accounts, as well as several technical amendments that would 
     make these college savings programs more user-friendly.
       The college Savings Plans Network strongly supports an 
     exclusion from gross income for earnings on Sec. 529 
     accounts. This tax treatment would be less burdensome to 
     administer than current tax provisions, and would result in 
     better compliance and less cost to college savings programs 
     and their participants. More importantly, an exclusion from 
     gross income would provide a powerful additional incentive 
     for families to save early for college expenses. Section 529 
     of the Internal Revenue Code already contains restrictions 
     and penalties to prevent any potential abuse of these 
     programs.

[[Page S1420]]

       Please do not hesitate to contact me should you need any 
     additional information or have any questions. Thank you again 
     for your continued interest in and support of Sec. 529 
     programs and the hundreds of thousands of children for whom 
     college is now an affordable reality.
           Sincerely,
                                                    George Thomas,
         Chair, College Savings Plans Network and New Hampshire 
           State Treasurer.

  Mr. GRAHAM. Mr. President, I am proud to join Senator McConnell and 
my other Senate colleagues in launching an initiative to increase 
Americans' access to college education. Today, we are introducing the 
Setting Aside for a Valuable Education Act. This bill extends tax-free 
treatment to all state sponsored prepaid tuition plans and state 
savings plans. This legislation also gives prepaid tuition plans 
established by private colleges and universities tax-exempt status.
  Prepaid college tuition and savings programs have flourished at the 
state level in the face of spiraling college costs. According to the 
College Board, between 1980 and 2000, the cost of going to a four-year 
college has increased 115 percent above the rate of inflation. 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.
  In response to higher college costs the states have engineered 
innovative ways to help its families afford college. Michigan 
implemented the first prepaid tuition plan in 1986. Florida followed in 
1988. Today 49 states have either implemented or are in the process of 
implementing prepaid tuition plans or state education savings plans.
  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 
and guarantees financial access to a future college education. In 1996, 
Congress acted to ensure that the tax on the earnings in these state-
sponsored programs is tax-deferred.
  Senator McConnell and I believe the 107th Congress must move to make 
these programs completely tax free. Students should be able to enroll 
in college without the fear of incurring a significant tax liability 
just because they went to school. The legislation extends this same tax 
treatment to private college prepaid programs.
  We believe that these programs should be tax free for numerous 
reasons. First, 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 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 income of less than $50,000. Second, 
Congress should make these programs tax free in order to encourage 
savings and college attendance. Finally, for most families, these plans 
simply represent the purchase of a service to be provided in the 
future. The accounts are not liquid, and the funds are transferred from 
the state directly to the college or university. The imposition of a 
tax liability on earnings represents a substantial burden, because the 
student is required to find other means of generating the funds to pay 
the tax.
  I am pleased to have this opportunity to join my colleagues in 
introducing this bill which makes a college education easier to obtain.
                                 ______