[Senate Report 107-12]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 34
107th Congress                                                   Report
                                 SENATE
 1st Session                                                     107-12

======================================================================



 
                S. 763--AFFORDABLE EDUCATION ACT OF 2001

                                _______
                                

                 April 24, 2001.--Ordered to be printed

                                _______
                                

  Mr. Grassley, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 763]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance reported an original bill (S. 763) 
to amend the Internal Revenue Code of 1986 to allow tax-free 
expenditures from education individual retirement accounts for 
elementary and secondary school expenses, to increase the 
maximum annual amount of contributions to such accounts, and 
for other purposes, having considered the same, reports 
favorably thereon and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background and Summary................................2
        A. Legislative Background................................     2
        B. Summary...............................................     2
II. Explanation of the Bill...........................................3
        A. Education Savings Incentives (Title I)................     3
            1. Modifications to education IRAs (sec. 101)........     3
            2. Private prepaid tuition programs; exclusion from 
                gross income of education distributions from 
                qualified tuition programs (sec. 102)............     8
        B. Educational Assistance (Title II).....................    11
            1. Exclusion for employer-provided educational 
                assistance (sec. 201)............................    11
            2. Modifications to student loan interest deduction 
                (sec. 202).......................................    13
            3. Eliminate tax on awards under National Health 
                Service Corps Scholarship Program and F. Edward 
                Herbert Armed Forces Health Professions 
                Scholarship and Financial Assistance Program 
                (sec. 203).......................................    14
        C. Tax Benefits for Certain Types of Bonds for 
            Educational Facilities and Activities (Title III)....    15
III.Budget Effects of the Bill.......................................19

        A. Committee Estimates...................................    19
        B. Budget Authority and Tax Expenditures.................    21
        C. Consultation With the Congressional Budget Office.....    21
IV. Votes of the Committee...........................................23
 V. Regulatory Impact and Other Matters..............................23
        A. Regulatory Impact.....................................    23
        B. Unfunded Mandates Statement...........................    24
        C. Tax Complexity Analysis...............................    24
VI. Changes in Existing Law Made by the Bill, as Reported............25

                 I. LEGISLATIVE BACKGROUND AND SUMMARY


                       A. Legislative Background

    The Senate Committee on Finance marked up an original bill 
(the ``Affordable Education Act of 2001'') on March 13, 2001, 
and ordered the bill favorably reported by a roll call vote of 
20 yeas and no nays.

                               B. Summary


Education tax incentives (Title I)

    The bill increases the annual contribution limit for 
education IRAs from $500 to $2,000, expands the definition of 
qualified education to include qualified elementary and 
secondary education expenses, allows education IRA 
contributions for special needs beneficiaries above age 18, 
allows corporations and other entities to contribute to 
education IRAs, provides an exclusion from income for certain 
contributions to education IRAs, allows a taxpayer to exclude 
education IRA distributions from gross income and claim the 
HOPE or Lifetime Learning credits as long as they are not used 
for the same expenses, allows contributions to education IRAs 
and qualified tuition programs in the same year for the same 
beneficiary, eliminates the marriage penalty in the income 
phase-out ranges for education IRAs, and redesignates education 
IRAs as Coverdell Education Savings Accounts. The provisions 
modifying education IRAs generally are effective for taxable 
years beginning after December 31, 2001.
    The bill permits private educational institutions to offer 
prepaid tuition plans, effective for taxable years beginning 
after December 31, 2001. In addition, the bill allows a 
taxpayer to exclude certain distributions from qualified 
tuition programs from gross income and to claim the HOE or 
Lifetime Learning credit as long as they are not used for the 
same expenses. The bill also increases the amount of room and 
board expenses that can be paid from qualified tuition plans. 
The provision is generally effective for distributions made in 
taxable years beginning from December 31, 2001. The exclusion 
from gross income is extended to private prepaid tuition plans, 
effective for taxable years beginning from December 31, 2003.

Educational assistance (Title II)

    The bill makes permanent the exclusion from gross income 
for employer-provided educational assistance. In addition, the 
bill expands the exclusion to apply to graduate courses. The 
provision is effective for courses beginning after December 31, 
2001.
    The bill eliminates the 60-month limit relating to the 
deduction for interest paid on qualified student loans and 
increases the income limits on the student loan interest 
deduction. The provision is effective for interest paid after 
December 31, 2001.
    The bill provides an exclusion from gross income for awards 
under the National Health Service Corps Scholarship program and 
the F. Edward Herbert Armed Forces Health Professions 
Scholarship and Financial Assistance program, effective for 
taxable years beginning after December 31, 2001.

Tax benefits for certain types of bonds for educational facilities and 
        activities (Title III)

    The bill increases the arbitrage rebate exception for 
governmental bonds used to finance qualified school 
construction from $10 million to $15 million, effective for 
bonds issued after December 31, 2001.
    The bill permits the issuance of tax-exempt private 
activity bonds for qualified education facilities with an 
annual volume cap of the greater of $10 per resident or $5 
million, effective for bonds issued after December 31, 2001.

                      II. EXPLANATION OF THE BILL


         A. Education Savings Incentives (Title I of the Bill)


1. Modifications to education IRAs (sec. 101 of the bill and sec. 530 
        of the Code)

                              present law

In general

    Section 530 of the Internal Revenue Code (the ``Code'') 
provides tax-exempt status to education individual retirement 
accounts (``education IRAs''), meaning certain trusts or 
custodial accounts which are created or organized in the United 
States exclusively for the purpose of paying the qualified 
higher education expenses of a designated beneficiary. 
Contributions to education IRAs may be made only in cash.\1\ 
Annual contributions to education IRAs may not exceed $500 per 
beneficiary (except in cases involving certain tax-free 
rollovers, as described below) and may not be made after the 
designated beneficiary reaches age 18.
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    \1\ Special estate and gift tax rules apply to contributions made 
to and distributions made from education IRAs.
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Phase out of contribution limit

    The $500 annual contribution limit for education IRAs is 
generally phased out ratably for contributors with modified 
adjusted gross income (``AGI'') between $95,000 and $110,000. 
The phase-out range for married taxpayers filing a joint return 
is $150,000 to $160,000 of modified AGI. Individuals with 
modified AGI above the phase-out range are not allowed to make 
contributions to an education IRA established on behalf of any 
individual.

Treatment of distributions

    Earnings on contributions to an education IRA generally are 
subject to tax when withdrawn. However, distributions from an 
education IRA are excludable from the gross income of the 
beneficiary to the extent that the total distribution does not 
exceed the ``qualified higher education expenses'' incurred by 
the beneficiary during the year the distribution is made.
    If the qualified higher education expenses of the 
beneficiary for the year are less than the total amount of the 
distribution (i.e., contributions and earnings combined) from 
an education IRA, then the qualified higher education expenses 
are deemed to be paid from a pro-rata share of both the 
principal and earnings components of the distribution. Thus, in 
such a case, only a portion of the earnings are excludable 
(i.e., the portion of the earnings based on the ratio that the 
qualified higher education expenses bear to the total amount of 
the distribution) and the remaining portion of the earnings is 
includable in the beneficiary's gross income.
    The earnings portion of a distribution from an education 
IRA that is includable in income is also subject to an 
additional 10-percent tax. The 10-percent additional tax does 
not apply if a distribution is made on account of the death or 
disability of the designated beneficiary, or on account of a 
scholarship received by the designated beneficiary.
    The additional 10-percent tax also does not apply to the 
distribution of any contribution to an education IRA made 
during the taxable year if such distribution is made on or 
before the date that a return is required to be filed 
(including extensions of time) by the beneficiary for the 
taxable year during which the contribution was made (or, if the 
beneficiary is not required to file such a return, April 15th 
of the year following the taxable year during which the 
contribution was made).
    Present law allows tax-free transfers or rollovers of 
account balances from one education IRA benefiting one 
beneficiary to another education IRA benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary and is under age 30.
    Any balance remaining in an education IRA is deemed to be 
distributed within 30 days after the date that the beneficiary 
reaches age 30 (or, if earlier, within 30 days of the date that 
the beneficiary dies).

Qualified higher education expenses

    The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis. 
Qualified higher education expenses include expenses with 
respect to undergraduate or graduate-level courses. In 
addition, qualified higher education expenses include amounts 
paid or incurred to purchase tuition credits (or to make 
contributions to an account) under a qualified State tuition 
program, as defined in section 529, for the benefit of the 
beneficiary of the education IRA.
    Moreover, qualified higher education expenses include, 
within limits, room and board expenses for any academic period 
during which the beneficiary is at least a half-time student. 
Room and board expenses that may be treated as qualified higher 
education expenses are limited to the minimum room and board 
allowance applicable to the student in calculating costs of 
attendance for Federal financial aid programs under section 472 
of the Higher Education Act of 1965, as in effect on the date 
of enactment of the Small Business Job Protection Act of 1996 
(August 20, 1996). Thus, room and board expenses cannot exceed 
the following amounts: (1) for a student living at home with 
parents or guardians, $1,500 per academic year; (2) for a 
student living in housing owned or operated by the eligible 
education institution, the institution's ``normal'' room and 
board charge; and (3) for all other students, $2,500 per 
academic year.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127.
    Present law also provides that if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion for a distribution from an education 
IRA, then no deduction (e.g., for trade or business expenses), 
exclusion (e.g., for interest on education savings bond) or 
credit is allowed with respect to such expenses.
    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.

Time for making contributions

    Contributions to an education IRA for a taxable year are 
taken into account in the taxable year in which they are made.

Coordination with HOPE and Lifetime Learning credits

    If an exclusion from gross income is allowed for 
distributions from an education IRA with respect to an 
individual, then neither the HOPE nor Lifetime Learning credit 
may be claimed in the same taxable year with respect to the 
same individual. However, an individual may elect to waive the 
exclusion with respect to distributions from an education IRA. 
If such a waiver is made, then the HOPE or Lifetime Learning 
credit may be claimed with respect to the individual for the 
taxable year.

Coordination with qualified tuition programs

    An excise tax is imposed on contributions to an education 
IRA for a year if contributions are made by anyone to a 
qualified State tuition program on behalf of the same 
beneficiary in the same year. The excise tax is equal to 6 
percent of the contributions to the education IRA. The excise 
tax is imposed each year after the contribution is made, unless 
the contributions are withdrawn.

                           reasons for change

    Education IRAs were intended to help families plan for 
their children's education. However, the Committee believes 
that the present-law limits on contributions to education IRAs 
do not permit taxpayers to save adequately. Therefore, the 
Committee bill increases the contributions limits to education 
IRAs and provides an exclusion for certain employer 
contributions to education IRAs.
    The Committee believes that education IRAs should be 
expanded to provide greater flexibility to families in 
providing for their children's education at all levels of 
education. Thus, the Committee bill allows education IRAs to be 
used for expenses related to elementary and secondary 
education.
    The Committee believes that other modifications will also 
improve the attractiveness and operation of education IRAs, 
thus improving the effectiveness of education IRAs in assisting 
families in paying for education. Such modifications include 
more flexible rules for education IRAs for special needs 
beneficiaries and relaxation of the rules restricting the use 
of education IRAs and other tax benefits for education in the 
same year.
    Finally, the Committee wishes to recognize the tireless 
work of our late colleague Senator Paul Coverdell to improve 
the quality of education in our country. Thus, the Committee 
bill renames education IRAs as Coverdell education savings 
accounts.

                       explanation of provisions

Redesignation of education IRAs as Coverdell education savings accounts

    The bill renames ``education IRAs'' as ``Coverdell 
education savings accounts.''

Annual contribution limit

    The bill increases the annual limit on contributions to 
Coverdell education savings accounts from $500 to $2,000. Thus, 
under the bill, aggregate contributions that may be made by all 
contributors to one (or more) Coverdell education savings 
account established on behalf of any particular beneficiary is 
limited to $2,000 for each year.

Exclusion for contributions to Coverdell education savings accounts

    The bill provides an exclusion from gross income and wages 
for Social Security tax purposes for certain employer 
contributions to a Coverdell education savings account for the 
employee, the employee's spouse, or a lineal descendent of the 
employee or his or her spouse (provided such individual 
otherwise meets the eligibility requirements for Coverdell 
education savings accounts). The maximum amount excludable is 
$500 per year per each beneficiary. Thus, for example, if an 
employee has two children under age 18, the employer could 
contribute $500 each year to a Coverdell education savings 
account for each child. The exclusion does not apply to self-
employed individuals. The employer is required to report the 
amount of any Coverdell education savings account contributions 
on the employee's W-2 for the year.
    In order to be excludable from gross income, the 
contribution must be made pursuant to a plan that meets the 
requirements of an educational assistance program under section 
127. Thus, for example, the plan must be in writing and must 
satisfy nondiscrimination rules.
    Coverdell education savings accounts contributions that are 
excludable from gross income are treated as earnings for 
purposes of determining the amount includable in gross income, 
if any, due to a withdrawal from the Coverdell education 
savings account.

Qualified education expenses

    The bill expands the definition of qualified education 
expenses that may be paid tax-free from a Coverdell education 
savings account to include ``qualified elementary and secondary 
school expenses,'' meaning expenses for (1) tuition, fees, 
academic tutoring, special need services, books, supplies, 
computer equipment (including related software and services), 
and other equipment incurred in connection with the enrollment 
or attendance of the beneficiary at a public, private, or 
religious school providing elementary education (kindergarten 
through grade 12) as determined under State law, and (2) room 
and board, uniforms, transportation, and supplementary items or 
services (including expended day programs) required or provided 
by such a school in connection with such enrollment or 
attendance of the beneficiary.

Phase out of contribution limit

    The bill increases the phase-out range for married 
taxpayers filing a joint return so that it is twice the range 
for single taxpayers. Thus, the phase-out range for married 
taxpayers filing a joint return is $190,000 to $220,000 of 
modified AGI.

Special needs beneficiaries

    The bill provides that the rule prohibiting contributions 
to a Coverdell education savings account after the beneficiary 
attains 18 does not apply in the case of a special needs 
beneficiary (as defined by Treasury Department regulations). In 
addition, a deemed distribution of any balance in a Coverdell 
education savings account does not occur when a special needs 
beneficiary reaches age 30.

Contributions by persons other than individuals

    The bill clarifies that corporations and other entities 
(including tax-exempt organizations) are permitted to make 
contributions to Coverdell education savings accounts, 
regardless of the income of the corporation or entity during 
the year of the contribution.

Contributions permitted until April 15

    Under the proposal, individual contributors to Coverdell 
education savings accounts are deemed to have made a 
contribution on the last day of the preceding taxable year if 
the contribution is made on account of such taxable year and is 
made not later than the time prescribed by law for filing the 
individual's Federal income tax return for such taxable year 
(not including extensions). Thus, individual contributors 
generally may make contributions for a year until April 15 of 
the following year.

Qualified room and board expenses

    The bill modifies the definition of room and board expenses 
considered to be qualified higher education expenses. This 
modification is described in Part II.A.2, below.

Coordination with HOPE and Lifetime Learning credits

    The bill allows a taxpayer to claim a HOPE credit or 
Lifetime Learning credit for a taxable year and to exclude from 
gross income amounts distributed (both the contributions and 
the earnings portions) from a Coverdell education savings 
account on behalf of the same student as long as the 
distribution is not used for the same educational expenses for 
which a credit was claimed.

Coordination with qualified tuition programs

    The bill repeals the excise tax on contributions made by 
any person to a Coverdell education savings account on behalf 
of a beneficiary during any taxable year in which any 
contributions are made by anyone to a qualified State tuition 
program on behalf of the same beneficiary.
    If distributions from a Coverdell education savings account 
and qualified tuition programs exceed the beneficiary's 
qualified higher education expenses for the year (after 
reduction by amounts used in claiming the HOPE or Lifetime 
Learning credit), the beneficiary must allocate the expenses 
between the distributions to determine the amount includible in 
income.

Effective date

    The provisions modifying Coverdell education savings 
accounts are effective for taxable years beginning after 
December 31, 2001, except that the redesignation of Coverdell 
education savings accounts as Coverdell education savings 
accounts is effective on the date of enactment.

2. Private prepaid tuition programs; exclusion from gross income of 
        education distributions from qualified tuition programs (sec. 
        102 of the bill and sec. 529 of the Code)

                              present law

    Section 529 of the Code provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain programs 
established and maintained by a State (or agency or 
instrumentality thereof) under which persons may (1) purchase 
tuition credits or certificates on behalf of a designated 
beneficiary that entitle the beneficiary to a waiver or payment 
of qualified higher education expenses of the beneficiary, or 
(2) make contributions to an account that is established for 
the purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account (a ``savings account 
plan''). The term ``qualified higher education expenses'' 
generally has the same meaning as does the term for purposes of 
Coverdell education savings accounts (as described above) and, 
thus, includes expenses for tuition, fees, books, supplies, and 
equipment required for the enrollment or attendance at an 
eligible educational institution,\2\ as well as certain room 
and board expenses for any period during which the student is 
at least a half-time student.
---------------------------------------------------------------------------
    \2\ An ``eligible education institution'' is defined the same for 
purposes of education IRAs (described in Part II.A.1, above) and 
qualified State tuition programs.
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    No amount is included in the gross income of a contributor 
to, or a beneficiary of, a qualified State tuition program with 
respect to any distribution from, or earnings under, such 
program, except that (1) amounts distributed or educational 
benefits provided to a beneficiary are included in the 
beneficiary's gross income (unless excludable under another 
Code section) to the extent such amounts or the value of the 
educational benefits exceed contributions made on behalf of the 
beneficiary, and (2) amounts distributed to a contributor 
(e.g., when a parent receives a refund) are included in the 
contributor's gross income to the extent such amounts exceed 
contributions made on behalf of the beneficiary.\3\
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    \3\ Distributions from qualified State tuition programs are treated 
as representing a pro rata share of the contributions and earnings in 
the account.
---------------------------------------------------------------------------
    A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\4\ 
Contributors and beneficiaries are now allowed to direct the 
investment of contributions to the program (or earnings 
thereon). The program is required to maintain a separate 
accounting for each designated beneficiary. A specified 
individual must be designated as the beneficiary at the 
commencement of participation in a qualified State tuition 
program (i.e., when contributions are first made to purchase an 
interest in such a program), unless interests in such a program 
are purchased by a State or local government or a tax-exempt 
charity described in section 501(c)(3) as part of a scholarship 
program operated by such government or charity under which 
beneficiaries to be named in the future will receive such 
interests as scholarships.
---------------------------------------------------------------------------
    \4\ Special estate and gift tax rules apply to contributions made 
to and distributions made from qualified State tuition programs.
---------------------------------------------------------------------------
    A transfer of credits (or other amounts) from one account 
benefiting one designated beneficiary to another account 
benefiting a different beneficiary is considered a distribution 
(as is a change in the designated beneficiary of an interest in 
a qualified State tuition program), unless the beneficiaries 
are members of the same family. For this purpose, the term 
``member of the family'' means: (1) the spouse of the 
beneficiary; (2) a son or daughter of the beneficiary or a 
descendent of either; (3) a stepson or stepdaughter of the 
beneficiary; (4) a brother, sister, stepbrother or stepsister 
of the beneficiary; (5) the father or mother of the beneficiary 
or an ancestor of either; (6) a stepfather or stepmother of the 
beneficiary; (7) a son or daughter of a brother or sister of 
the beneficiary; (8) a brother or sister of the father or 
mother of the beneficiary; (9) a son-in-law, daughter-in-law, 
father-in-law, mother-in-law, brother-in-law, or sister-in-law 
of the beneficiary; or (10) the spouse of any person described 
in (2)-(9).
    Earnings on an account may be refunded to a contributor or 
beneficiary, but the State or instrumentality must impose a 
more than de minimis monetary penalty unless the refund is (1) 
used for qualified higher education expenses of the 
beneficiary, (2) made on account of the death or disability of 
the beneficiary, or (3) made on account of a scholarship 
received by the beneficiary to the extent the amount refunded 
does not exceed the amount of the scholarship used for higher 
education expenses.
    To the extent that a distribution from a qualified State 
tuition program is used to pay for qualified tuition and 
related expenses (as defined in sec. 25A(f)(1)), the 
beneficiary (or another taxpayer claiming the beneficiary as a 
dependent) may claim the HOPE credit or Lifetime Learning 
credit with respect to such tuition and related expenses 
(assuming that the other requirements for claiming the HOPE 
credit or Lifetime Learning credit are satisfied and the 
modified AGI phaseout for those credits does not apply).

                           reasons for change

    The Committee believes that distributions from qualified 
State tuition programs should not be subject to Federal income 
tax to the extent that such distributions are used to pay for 
qualified higher education expenses of undergraduate or 
graduate students who are attending college, university, or 
certain vocational schools. In addition, the Committee believes 
that the present-law rules governing qualified tuition programs 
should be expanded to permit private educational institutions 
to maintain certain prepaid tuition programs. The Committee 
believes that the amount of room and board expenses that can be 
paid with tax-free distributions from prepaid tuition plans 
should reflect current costs.

                        explanation of provision

Qualified tuition program

    The bill expands the definition of ``qualified tuition 
program'' to include certain prepaid tuition programs 
established and maintained by one or more eligible educational 
institutions (which may be private institutions) that satisfy 
the requirements under section 529 (other than the present-law 
State sponsorship rule). In the case of a qualified tuition 
program maintained by one or more private eligible educational 
institutions, persons are able to purchase tuition credits or 
certificates on behalf of a designated beneficiary (as set 
forth in sec. 529(b)(1)(A)(i)), but are not able to make 
contributions to a savings account plan (as described in 
section 529(b)(1)(A)(ii)). Except to the extent provided in 
regulations tuition program maintained by a private institution 
would not be treated as qualified unless it has received a rule 
or determination that the program satisfies applicable 
requirements.

Exclusion from gross income

    Under the bill, an exclusion from gross income is provided 
for distributions made in taxable years beginning after 
December 31, 2001, from qualified State tuition programs to the 
extent that the distribution is used to pay for qualified 
higher education expenses. This exclusion from gross income is 
extended to distributions from qualified tuition programs 
established and maintained by an entity other than a State (or 
agency or instrumentality thereof) for distributions made in 
taxable years after December 31, 2003.

Qualified higher education expenses

    The bill provides that, for purposes of the exclusion for 
distributions from qualified tuition plans, the maximum room 
and board allowance is the amount applicable to the student in 
calculating costs of attendance for Federal financial aid 
programs under section 472 of the Higher Education Act of 1965, 
as in effect on the date of enactment of this Act, or, in the 
case of a student living in housing owned or operated by an 
eligible educational institution, the actual amount charged the 
student by the educational institution for room and board.\5\
---------------------------------------------------------------------------
    \5\ This definition would also apply to distributions from 
education IRAs.
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Coordination with HOPE and Lifetime Learning credits

    The bill allows a taxpayer to claim a HOPE credit or 
Lifetime Learning credit for a taxable year and to exclude from 
gross income amounts distributed (both the principal and the 
earnings portions) from a qualified tuition program on behalf 
of the same student as long as the distribution is not used for 
the same expenses for which a credit was claimed.

Rollovers for benefit of same beneficiary

    The bill provides that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of 
a designated beneficiary to another qualified tuition program 
for the benefit of the same beneficiary is not considered a 
distribution. This rollover treatment applies to a maximum of 
three such transfers with respect to the same designated 
beneficiary.

Member of family

    The bill provides that, for purposes of tax-free rollovers 
and changes of designated beneficiaries, a ``member of the 
family'' includes first cousins of the original beneficiary.

Effective date

    The provision is effective for taxable years beginning 
after December 31, 2001, except that the exclusion from gross 
income for certain distributions from a qualified tuition 
program established and maintained by an entity other than a 
State (or agency or instrumentality thereof) is effective for 
taxable years beginning after December 31, 2003.

            B. Educational Assistance (Title II of the Bill)


1. Exclusion for employer-provided educational assistance (sec. 201 of 
        the bill and sec. 127 of the Code)

                              Present Law

    Educational expenses paid by an employer for its employees 
are generally deductible by the employer.
    Employer-paid educational expenses are excludable from the 
gross income and wages of an employee if provided under a 
section 127 educational assistance plan or if the expenses 
qualify as a working condition fringe benefit under section 
132. Section 127 provides an exclusion of $5,250 annually for 
employer-provided educational assistance. The exclusion does 
not apply to graduate courses beginning after June 30, 1996. 
The exclusion for employer-provided educational assistance for 
undergraduate courses expires with respect to courses beginning 
after December 31, 2001.
    In order for the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
educational assistance program must not discriminate in favor 
of highly compensated employees. In addition, not more than 
five percent of the amounts paid or incurred by the employer 
during the year for educational assistance under a qualified 
educational assistance plan can be provided for the class of 
individuals consisting of more than five percent owners of the 
employer (and their spouses and dependents).
    Educational expenses that do not qualify for the section 
127 exclusion may be excludable from income as a working 
condition fringe benefit.\6\ In general, education qualifies as 
a working condition fringe benefit if the employee could have 
deducted the education expenses under section 162 if the 
employee paid for the education. In general, education expenses 
are deductible by an individual under section 162 if the 
education (1) maintains or improves a skill required in a trade 
or business currently engaged in by the taxpayer, or (2) meets 
the express requirements of the taxpayer's employer, applicable 
law or regulations imposed as a condition of continued 
employment. However, education expenses are generally not 
deductible if they relate to certain minimum educational 
requirements or to education or training that enables a 
taxpayer to begin working in a new trade or business.\7\
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    \6\ These rules also apply in the event that section 127 expires.
    \7\ In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized deduction 
only if such expenses, along with other miscellaneous expenses, exceed 
two percent of the taxpayer's AGI. An individual's total deductions may 
also be reduced by the overall limitation on itemized deductions under 
section 68. These limitations do not apply in determining whether an 
item is excludable from income as a working condition fringe benefit.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers 
to advance their education and improve their job skills without 
incurring additional taxes and a reduction in take-home pay. In 
addition, the exclusion lessens the complexity of the tax laws. 
Without the special exclusion, a worker receiving educational 
assistance from his or her employer is subject to tax on the 
assistance, unless the education is related to the worker's 
current job. Because the determination of whether particular 
educational assistance is job related is based on the facts and 
circumstances, it may be difficult to determine with certainty 
whether the educational assistance is excludable from income. 
This uncertainty may lead to disputes between taxpayers and the 
Internal Revenue Service.
    The Committee believes that reinstating the exclusion for 
graduate-level employer-provided educational assistance will 
enable more individuals to seek higher education, and that 
further extension of the exclusion is important.
    The past experience of allowing the exclusion to expire and 
later extending it retroactively has created burdens for 
employers and employees. Employees may have difficulty planning 
for their educational goals if they do not know whether their 
tax bills will increase. For employers, the lack of permanence 
of the provision has caused severe administrative problems. 
Uncertainty about the exclusion's future may discourage some 
employers from providing educational benefits.

                        explanation of provision

    The bill extends the exclusion for employer-provided 
educational assistance to graduate education and makes the 
exclusion (as applied to both undergraduate and graduate 
education) permanent.
    Effective date.--The provision is effective with respect to 
courses beginning after December 31, 2001.

2. Modifications to student loan interest deduction (sec. 202 of the 
        bill and sec. 221 of the Code)

                              present law

    Certain individuals may claim an above-the-line deduction 
for interest paid on qualified education loans, subject to a 
maximum annual deduction limit. The deduction is allowed only 
with respect to interest paid on a qualified education loan 
during the first 60 months in which interest payments are 
required. Required payments of interest generally do not 
include voluntary payments, such as interest payments made 
during a period of loan forbearance. Months during which 
interest payments are not required because the qualified 
education loan is in deferral or forbearance do not count 
against the 60-month period. No deduction is allowed to an 
individual if that individual is claimed as a dependent on 
another taxpayer's return for the taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
    The maximum allowable annual deduction is $2,500. The 
deduction is phased out ratably for single taxpayers with 
modified AGI between $40,000 and $55,000 and for married 
taxpayers filing joint returns with modified AGI between 
$60,000 and $75,000. The income ranges will be indexed for 
inflation after 2002.

                           reasons for change

    The Committee believes that it is appropriate to expand the 
deduction for individuals who pay interest on qualified 
education loans by repealing the limitation that the deduction 
is allowed only with respect to interest paid during the first 
60 months in which interest payments are required. In addition, 
the repeal of the 60-month limitation lessens complexity and 
administrative burdens for taxpayers, lenders, loan servicing 
agencies, and the Internal Revenue Service. The Committee also 
believes it appropriate to increase the income phase-out ranges 
applicable to the student loan interest deduction to make the 
deduction available to more taxpayers and to reduce the 
potential marriage penalty caused by the phase-out ranges.

                        explanation of provision

    The bill increases the income phase-out ranges for 
eligibility for the student loan interest deduction to $50,000 
to $65,0000 for single taxpayers to $100,000 to $130,000 for 
married taxpayers filing joint returns. These income phase-out 
ranges are indexed for inflation after 2002.
    The bill repeals both the limit on the number of months 
during which interest paid on a qualified education loan is 
deductible and the restriction that voluntary payments of 
interest are not deductible.
    Effective date.--the provision is effective for interest 
paid on qualified education loans after December 31, 2001.

3. Eliminate tax on awards under the National Health Service Corps 
        Scholarship Program and the F. Edward Hebert Armed Forces 
        Health Professions Scholarship and Financial Assistance Program 
        (sec. 203 of the bill and sec. 117 of the Code)

                              present law

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarships, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
    The exclusion for qualified scholarships and qualified 
tuition reductions does not apply to any amount received by a 
student that represents payment for teaching, research, or 
other services by the student required as a condition for 
receiving the scholarship or tuition reduction.
    The National Health Service Corps Scholarship Program (the 
``NHSC Scholarship Program'') and the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program (the ``Armed Forces Scholarship Program'') provide 
education awards to participants on the condition that the 
participants provide certain services. In the case of the NHSC 
Program, the recipient of the scholarship is obligated to 
provide medical services in a geographic area (or to an 
underserved population group or designated facility) identified 
by the Public Health Service as having a shortage of health 
care professionals. In the case of the Armed Forces Scholarship 
Program, the recipient of the scholarship is obligated to serve 
a certain number of years in the military at an armed forces 
medical facility. Because the recipients are required to 
perform services in exchange for the education awards, the 
awards used to pay higher education expenses are taxable income 
to the recipient.

                           reasons for change

    The Committee believes it appropriate to provide tax-free 
treatment for scholarships received by medical, dental, 
nursing, and physician assistant students under the NHSC 
Scholarship Program and the Armed Forces Scholarship Program.

                        explanation of provision

    The proposal would provide that amounts received by an 
individual under the NHSC Scholarship Program or the Armed 
Forces Scholarship Program are eligible for tax-free treatment 
as qualified scholarships under section 117, without regard to 
any service obligation by the recipient. As with other 
qualified scholarships under section 117, the tax-free 
treatment would not apply to amounts received by students for 
regular living expenses, including room and board.
    Effective date.--The provision is effective for education 
awards received after December 31, 2001.

 C. Tax Benefits for Certain Types of Bonds for Educational Facilities 
 and Activities (Title III of the Bill) (Secs. 301-302 of the Bill and 
                   Secs. 142 and 146-148 of the Code)


                              present law

Tax-exempt bonds

            In general
    Interest on debt \8\ incurred by States or local 
governments is excluded from income if the proceeds of the 
borrowing are used to carry out governmental functions of those 
entities or the debt is repaid with governmental funds (sec. 
103).\9\ Like other activities carried out or paid for by 
States and local governments, the construction, renovation, and 
operation of public schools is an activity eligible for 
financing with the proceeds of tax-exempt bonds.
---------------------------------------------------------------------------
    \8\ Hereinafter referred to as ``State or local government bonds.''
    \9\ Interest on this debt included in calculating the ``adjusted 
current earnings'' preference of the corporate alternative minimum tax.
---------------------------------------------------------------------------
    Interest on bonds that nominally are issued by States or 
local governments, but the proceeds of which are used (directly 
or indirectly) by a private person and payment of which is 
derived from funds of such a private person is taxable unless 
the purpose of the borrowing is approved specifically in the 
Code or in a non-Code provision of a revenue Act. These bonds 
are called ``private activity bonds.'' \10\ The term ``private 
person'' includes the Federal Government and all other 
individuals and entities other than States or local 
governments.
---------------------------------------------------------------------------
    \10\ Interest on private activity bonds (other than qualified 
501(c)(3) bonds) is a preference item in calculating the alternative 
minimum tax.
---------------------------------------------------------------------------
            Private activities eligible for financing with tax-exempt 
                    private activity bonds
    Present law includes several exceptions permitting States 
or local governments to act as conduits providing tax-exempt 
financing for private activities. Both capital expenditures and 
limited working capital expenditures of charitable 
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds 
(``qualified 501(c)(3) bonds'').
    States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private 
businesses. Business facilities eligible for this financing 
include transportation (airports, ports, local mass commuting, 
and high speed intercity rail facilities); privately owned and/
or privately operated public works facilities (sewage, solid 
waste disposal, local district heating or cooling, and 
hazardous waste disposal facilities); privately-owned and/or 
operated low-income rental housing; and certain private 
facilities for the local furnishing of electricity or gas. A 
further provision allows tax-exempt financing for 
``environmental enhancements of hydro-electric generating 
facilities.'' Tax-exempt financing also is authorized for 
capital expenditures for small manufacturing facilities and 
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified 
redevelopment bonds''), and eligible empowerment zone and 
enterprise community businesses. Tax-exempt private activity 
bonds also may be issued to finance limited non-business 
purposes: certain student loans and mortgage loans for owner-
occupied housing (``qualified mortgage bonds'' and ``qualified 
veterans' mortgage bonds'').
    Private activity tax-exempt bonds may not be issued to 
finance schools for private, for-profit businesses.
    In most cases, the aggregate volume of private activity 
tax-exempt bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
These annual volume limits are equal to $62.50 per resident of 
the State, or $187.5 million if greater. The volume limits are 
scheduled to increase to the greater of $75 per resident of the 
State or $225 million in calendar year 2002. After 2002, the 
volume limits will be indexed annually for inflation.
            Arbitrage restrictions on tax-exempt bonds
    The Federal income tax does not apply to the income of 
States and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed 
or from issuing such bonds earlier than needed for the purpose 
of the borrowing, the Code includes arbitrage restrictions 
limiting the ability to profit from investment of tax-exempt 
bond proceeds. In general, arbitrage profits may be earned only 
during specified periods (e.g., defined ``temporary periods'' 
before funds are needed for the purpose of the borrowing) or on 
specified types of investments (e.g. ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government.
    Present law includes three exceptions to the arbitrage 
rebate requirements applicable to education-related bonds. 
First, issuers of all types of tax-exempt bonds are not 
required to rebate arbitrage profits if all of the proceeds of 
the bonds are spent for the purpose of the borrowing within six 
months after issuance.\11\
---------------------------------------------------------------------------
    \11\ In the case of governmental bonds (including bonds to finance 
public schools), the six-month expenditure exception is treated as 
satisfied if at least 95 percent of the proceeds is spent within six 
months and the remaining five percent is spent within 12 months after 
the bonds are issued.
---------------------------------------------------------------------------
    Second, in the case of bonds to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months. 
Arbitrage profits earned on construction proceeds are not 
required to be rebated if all such proceeds (other than certain 
retainage amounts) are spent by the end of the 24-month period 
and prescribed intermediate spending percentages are 
satisfied.\12\ Issuers qualifying for this ``construction 
bond'' exception may elect to be subject to a fixed penalty 
payment regime in lieu of rebate if they fail to satisfy the 
spending requirements.
---------------------------------------------------------------------------
    \12\ Retainage amounts are limited to no more than five percent of 
the bond proceeds, and these amounts must be spent for the purpose of 
the borrowing no later than 36 months after the bonds are issued.
---------------------------------------------------------------------------
    Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no 
more than $5 million of tax-exempt governmental bonds in a 
calendar year. The $5 million limit is increased to $10 million 
if at least $5 million of the bonds are used to finance public 
schools.\13\
---------------------------------------------------------------------------
    \13\ The Small Business Job Protection Act of 1996 permitted 
issuance of the additional $5 million in public school bonds by small 
governments. Previously, small governments were defined as governments 
that issued no more than $5 million of governmental bonds without 
regard to the purpose of the financing.
---------------------------------------------------------------------------

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments are given the authority to issue 
``qualified zone academy bonds.'' Under present law, a total of 
$400 million of qualified zone academy bonds may be issued in 
each of 1998 through 2001. The $400 million aggregate bond 
authority is allocated each year to the States according to 
their respective populations of individuals below the poverty 
line. Each State, in turn, allocates the credit to qualified 
zone academies within such State. A State may carry over an 
unused allocation for up to two years (three years for 
authority arising before 2000).
    Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold qualified zone academy bonds are 
entitled to a nonrefundable tax credit in the amount equal to a 
credit rate multiplied by the face amount of the bond. An 
eligible financial institution holding a qualified zone academy 
bond on the credit allowance date (i.e., each one-year 
anniversary of the issuance of the bond) is entitled to a 
credit. The credit amount is includable in gross income (as if 
it were a taxable interest payment on the bond), and the credit 
may be claimed against regular income tax and alternative 
minimum tax liability.
    The Treasury Department sets the credit rate daily at a 
rate estimated to allow issuance of qualified zone academy 
bonds without discount and without interest cost to the issuer. 
The maximum term of the bonds also is determined by the 
Treasury Department, so that the present value of the 
obligation to repay the bond is 50 percent of the face value of 
the bond. Present value is determined using as a discount rate 
the average annual interest rate of tax-exempt obligations with 
a term of 10 years or more issued during the month.
    ``Qualified zone academy bonds'' are defined as bonds 
issued by a State or local government, provided that: (1) at 
least 95 percent of the proceeds is used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers, and other school personnel in 
a ``qualified zone academy'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A school is a ``qualified zone academy'' if (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in a designated 
empowerment zone or a designated enterprise community, or (b) 
it is reasonably expected that at least 35 percent of the 
students at the school will be eligible for free or reduced-
cost lunches under the school lunch program established under 
the National School Lunch Act.

                           reasons for change

    The policy underlying the arbitrage rebate exception for 
bonds of small governmental units is to reduce complexity for 
these entities because they may not have in-house financial 
staff to engage in the expenditure and investment tracking 
necessary for rebate compliance. The exception further is 
justified by the limited potential for arbitrage profits at 
small issuance levels and limitation of the provision to 
governmental bonds, which typically require voter approval 
before issuance. The Committee believes that a limited increase 
of $5 million per year for public school construction bonds 
will more accurately conform this present-law exception to 
current school construction costs.
    Further, the Committee wishes to encourage public-private 
partnerships to improve educational opportunities. To permit 
public-private partnerships to reap the benefit of the implicit 
subsidy to capital costs provided through tax-exempt financing, 
the Committee determining that it is appropriate to allow the 
issuance of tax-exempt private activity bonds for public school 
facilities.

                       explanation of provisions

Increase amount of governmental bonds that may be issued by governments 
        qualifying for the ``small governmental unit'' arbitrage rebate 
        exception

    The additional amount of governmental bonds for public 
schools that small governmental units may issue without being 
subject to the arbitrage rebate requirements is increased from 
$5 million to $10 million. Thus, these governmental units may 
issue up to $15 million of governmental bonds in a calendar 
year provided that at least $10 million of the bonds are used 
to finance public school construction expenditures.

Allow issuance of tax-exempt private activity bonds for public school 
        facilities

    The private activities for which tax-exempt bonds may be 
issued are expanded to include elementary and secondary public 
school facilities which are owned by private, for-profit 
corporations pursuant to public-private partnership agreements 
with a State or local educational agency. The term school 
facility includes school buildings and functionally related and 
subordinate land (including stadiums or other athletic 
facilities primarily used for school events) \14\ and 
depreciable personal property used in the school facility. The 
school facilities for which these bonds are issued must be 
operated by a public agency as part of a system of public 
schools.
---------------------------------------------------------------------------
    \14\ The present-law limit on the amount of the proceeds of a 
private activity bond issue that may be used to finance land 
acquisition does not apply to these bonds.
---------------------------------------------------------------------------
    A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes or equips a school 
facility for a public school agency (typically pursuant to a 
lease arrangement). The agreement must provide that, at the end 
of the contract term, ownership of the bond-financed property 
is transferred to the public school agency party to the 
agreement for no additional consideration.
    Issuance of these bonds is subject to a separate annual 
per-State private activity bond volume limit equal to $10 per 
resident ($5 million, if greater) in lieu of the present-law 
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can 
decide how to allocate the bond authority to State and local 
government agencies. Bond authority that is unused in the year 
in which it arises may be carried forward for up to three years 
for public school projects under rules similar to the 
carryforward rules of the present-law private activity bond 
volume limits.

Effective date

    The provisions are effective for bonds issued after 
December 31, 2001.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the ``Affordable Education Act of 2001'' as 
reported.

                                          ESTIMATED REVENUE EFFECTS OF THE ``AFFORDABLE EDUCATION ACT OF 2001'' AS REPORTED BY THE COMMITTEE ON FINANCE
                                                                        [Fiscal years 2002-2011, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                     Provision                           Effective        2002      2003      2004      2005      2006      2007      2008      2009      2010      2011     2002-06    2002-11
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Education IRAs--
    a. Increase the annual contribution limit to        tyba 12/31/01       -175      -315      -397      -483      -575      -671      -771      -874      -982    -1,114     -1,944     -6,355
     $2,000; allow education IRA contributions for
     special needs beneficiaries above the age of
     18; allow corporations and other entities to
     contribute to education IRAs; allow
     contributions until April 15 of the following
     year; allow a taxpayer to exclude education
     IRA distributions from gross income and claim
     the HOPE or Lifetime Learning credits as long
     as they are not used for the same expenses;
     repeal excise tax on contributions made to
     education IRA when contribution made by
     anyone on behalf of same beneficiary to QTP;
     modify phaseout range for married taxpayers..
    b. Rename education IRAs ``Coverdell Education      tyba 12/31/01                                                       No Revenue Effect
     Savings Accounts''...........................
    c. Allow tax-free expenditures for elementary       tyba 12/31/01        -28       -50       -63       -77       -91      -106      -120      -137      -152      -171       -309       -996
     and secondary school expenses................
    d. Exclusion from income and wages for              tyba 12/31/01       -144      -209      -249      -272      -295      -318      -341      -365      -390      -415     -1,166     -2,995
     employer contributions to education IRAs.....
2. Qualified Tuition Plans--tax-free distributions      tyba 12/31/01        -24       -53       -81      -111      -141      -170      -200      -234      -256      -283       -410     -1,553
 from State plans; allow private institutions to
 offer prepaid tuition plans, tax-deferred in
 2002, with tax-free distributions beginning in
 2004; allow a taxpayer to exclude QTP
 distributions from gross income and claim the
 HOPE or Lifetime Learning credits as long as they
 are not used for the same expenses; expand
 definition of family member to include cousins;
 allow tax-free distributions for actual living
 expenses.........................................
    3. Employer Provided Assistance--permanently         cba 12/31/01       -519      -720      -760      -804      -852      -904      -958    -1,012    -1,068    -1,127     -3,656     -8,725
     extend the exclusion for undergraduate
     courses and graduate level courses...........
4. Student loan interest--eliminate the 60-month         ipa 12/31/01       -170      -245      -262      -277      -289      -305      -321      -338      -356      -375     -1,243     -2,937
 rule; increase phaseout ranges to $50,000-$65,000
 single/$100,000-$130,000 joint; indexed for
 inflation after 2002.............................
5. Eliminate the tax on awards under the National       tyba 12/31/01         -1        -1        -1        -1        -1        -1        -1        -1        -1        -1         -5         -9
 Health Corps Scholarship program and F. Edward
 Hebert Armed Forces Health Professions
 Scholarship program..............................
6. Increase arbitrage rebate exception for               bia 12/31/01      (\1\)        -3        -5        -6       -11       -15       -16       -17       -18       -19        -25       -109
 governmental bonds used to finance qualified
 school construction from $10 million to $15
 million..........................................
7. Issuance of tax-exempt private activity bonds         bia 12/31/01         -5       -19       -38       -61       -88      -120      -155      -191      -224      -257       -212     -1,160
 for qualified education facilities with annual
 volume cap the greater of $10 per resident or $5
 million..........................................
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Net Total...................................  ..................    -1,066    -1,615    -1,856    -2,092    -2,343    -2,610    -2,883    -3,169    -3,447    -3,762     -8,970    -24,839
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.

 Legend for ``Effective'' column: bia = bonds issued after; cba = courses beginning after; ipa = interest paid after; tybba = taxable years beginning after.

 Note.--Details may not add to totals due to rounding.

 Source: Joint Committee on Taxation.

                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the bill as 
reported involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III. A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 23, 2001.
Hon. Charles E. Grassley,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Affordable 
Education Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Erin 
Whitaker.
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

Affordable Education Act of 2001

    Summary: The Affordable Education Act of 2001 would make a 
number of changes in the tax code related to the financing of 
educational expenses. The Joint Committee on Taxation (JCT) 
estimates that these provisions would reduce revenues by about 
$1.1 billion in 2002, by about $9 billion over the 2002-2006 
period, and by $24.8 billion over the 2002-2011 period. Since 
the bill would affect receipts, pay-as-you-go procedures would 
apply. The bill contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Major provisions: The Affordable Education Act of 2001 
would redesignate educational individual retirement accounts 
(IRAs) as Coverdell Education Savings Accounts, increase the 
limit on annual contributions to the accounts from $500 to 
$2,000, expand the accounts to apply to elementary and 
secondary education, allow contributions for a taxable year to 
be made by April 15 of the following year, and repeal the 10 
percent excise tax on certain contributions. The bill also 
would expand the ability of married taxpayers filing joint 
returns to contribute to education savings accounts. The bill 
would increase the ranges of income for which the contribution 
limits are phased out, from $150,000 to $160,000 to modified 
adjusted gross income (AGI), to twice that of single taxpayers, 
or $190,000 to $220,000 of modified AGI. These and the other 
provisions of the bill would become effective on January 1, 
2002, unless otherwise noted.
    The bill also would expand the definition of qualified 
state tuition programs to include prepaid tuition plans 
established and maintained by certain educational institutions, 
including private institutions. Furthermore, beneficiaries 
would be allowed to exclude from taxable income all 
distributions from such prepaid tuition programs at private 
institutions starting in 2004, and distributions from all state 
plans starting in 2002.
    The Affordable Education Act of 2001 also would expand the 
ability of taxpayers to deduct interest paid on their student 
loans. The bill would increase the ranges of income for which 
the deduction claimed by taxpayers is phased out ratably. The 
phase-out range for taxpayers filing singly would change from 
between $40,000 and $50,000 to between $50,000 and $60,000, and 
the phase-out range for married taxpayers filing joint returns 
would change from between $60,000 and $70,000 to between 
$100,000 and $130,000. The phase-out ranges would be indexed 
for inflation after 2002. In addition, the bill would repeal 
the limit of 60 months during which a taxpayer can deduct such 
interest payments.
    The bill would make various other changes to tax incentives 
for education. The bill would extend the exclusion from gross 
income for employer-provided educational assistance to include 
graduate education, and would make that exclusion permanent for 
both undergraduate and graduate education. The bill would allow 
certain education awards to be excluded from gross income. The 
bill also would increase the amount of bonds for public schools 
that small governmental units may issue without being subject 
to the requirements for arbitrage rebate and would allow 
governments to issue a limited amount of tax-exempt bonds for 
certain privately-owned public school facilities. The bill 
would allow taxpayers to claim HOPE of Lifetime Learning 
credits if the distribution from education savings accounts or 
from qualified tuition programs is not used for the same 
expenses for which those credits were claimed.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the Affordable Education Act of 2001 is 
shown in the following table. All estimates were provided by 
JCT.

----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                          ------------------------------------------------------
                                                              2002       2003       2004       2005       2006
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated Revenues.......................................     -1,066     -1,615     -1,856     -2,092     -2,343
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.

    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up procedures for 
legislation affecting receipts or direct spending. The net 
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the 
purposes of enforcing pay-as-you-go procedures, only the 
effects in the current year, the budget year, and the 
succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in millions of dollars--
                                                     ---------------------------------------------------------------------------------------------------
                                                        2002      2003      2004      2005      2006      2007      2008      2009      2010      2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts.................................    -1,066    -1,615    -1,856    -2,092    -2,343    -2,610    -2,883    -3,169    -3,447    -3,762
Changes in outlays..................................                                            Not applicable
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: The bill 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Erin Whitaker.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of the ``Affordable Education Act of 2001.''

Motion to report the bill

    The bill (S. 763, the ``Affordable Education Act of 2001'') 
was ordered favorably reported, by a unanimous roll call vote 
of 200 yeas and 0 nays March 13, 2001. The vote, with a quorum 
present, was as follows:
    Yeas.--Senators Grassley, Hatch, Murkowski, Nickles, Gramm, 
Lott, Jeffords, Thompson, Snowe, Kyl, Baucus, Rockefeller, 
Daschle, Breaux, Conrad, Graham, Bingaman, Kerry, Torricelli, 
Lincoln.
    Nays.--None.

Votes on other amendments

    An amendment by Senators Torricelli and Lott to provide 
that elementary and secondary school expenses are qualified 
expenses that can be paid tax-free from an education IRA and 
making other changes to education IRAs was adopted on a roll 
call vote of 12 yeas and 8 nays. The vote, with a quorum 
present, was as follows:
    Yeas.--Senators Grassley, Hatch (proxy), Murkowski (proxy), 
Nickles, Gramm, Lott, Thompson (proxy), Snowe, Kyl, Breaux 
(proxy), Graham, Torricelli.
    Nays.--Senators Jeffords, Baucus, Rockefeller, Daschle, 
Conrad, Bingaman, Kerry, Lincoln.
    An amendment by Senator Kerry regarding school construction 
financing was defeated on a roll call vote which was a tie, 10 
yeas and 10 nays. The vote, with a quorum present, was as 
follows:
    Yeas.--Senators Baucus, Rockefeller, Daschle, Breaux, 
Conrad, Graham, Bingaman, Kerry, Torricelli, Lincoln.
    Nays.--Senators Grassley, Hatch, Murkowski, Nickles, Gramm, 
Lott, Jeffords, Thompson, Snowe, Kyl.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    With respect to individuals, the bill modifies the rules 
relating to (1) education IRAs, (2) qualified tuition plans, 
(3) the exclusion for employer-provided educational assistance, 
(4) the student loan interest deduction, and (5) the treatment 
of certain awards. Individuals may elect whether to avail 
themselves of the provisions of the bill. Thus, the provisions 
do not impose increased regulatory burdens on individuals. 
Certain provisions of the bill, such as the modifications to 
the student loan interest deduction and the permanent extension 
of the exclusion for employer-provided educational assistance, 
simplify the present-law rules and, therefore, reduce burdens 
on individuals electing to utilize the provision.
    Similarly, to the extent the provisions of the bill affect 
businesses, businesses may generally elect whether to avail 
themselves of the provision of the bill, e.g., whether to 
contribute to an education IRA on behalf of a beneficiary. 
Certain provision of the bill, e.g., the permanent extension of 
the exclusion for employer-provided education assistance, will 
also provide simplification of the present-law rules for 
businesses that utilize such provisions. Thus, the bill does 
not impose increased regulatory burden on businesses.

Impact on personal privacy and paperwork

    The provisions of the bill do not impact personal privacy. 
Individuals may elect whether to avail themselves of the 
provisions of the bill. Thus, the bill does not impose 
increased paperwork burdens on individuals. Individuals who 
elect to take advantage of the bill may in some cases need to 
keep records in order to demonstrate that they qualify for the 
tax treatment provided by the bill. In some cases the bill 
simplifies present law, thus reducing recordkeeping 
requirements.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee on Finance has reviewed the provisions of the 
bill as approved by the Committee on March 13, 2001. In 
accordance with the requirements of Public Law 104-4, the 
Committee has determined that no provisions of the bill contain 
Federal private sector mandates.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the ``Code'') and has widespread applicability to individuals 
or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Internal Revenue Code and that have 
``widespread applicability'' to individuals or small 
businesses.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                
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