To amend the Internal Revenue Code of 1986 to provide tax incentives for education.

Summary: Higher Education Affordability Act - Amends the Internal Revenue Code to exclude from income distributions from qualified tuition programs used for qualifying higher education expenses.Includes within the definition of "qualified State tuition program" programs maintained by eligible educational institutions.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Higher Education Affordability 
Act''.

SEC. 2. EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM 
              QUALIFIED TUITION PROGRAMS; COVERAGE OF PRIVATE PROGRAMS.

    (a) Exclusion.--
            (1) 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.--If a distributee elects the application of 
                this subparagraph for any taxable year--
                            ``(i) no amount shall be includible in 
                        gross income 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, and
                            ``(ii) the amount which (but for the 
                        election) would be includible in gross income 
                        by reason of any other distribution shall not 
                        be so includible in an amount which bears the 
                        same ratio to the amount which would be so 
                        includible as the amount of the qualified 
                        higher education expenses of the distributee 
                        bears to the amount of the distribution.''
            (2) Additional tax on amounts not used for higher education 
        expenses.--Section 529 of such Code is amended by adding at the 
        end the following new subsection:
    ``(f) Additional Tax for Distributions Not Used for Educational 
Expenses.--
            ``(1) In general.--The tax imposed by section 530(d)(4) 
        shall apply to payments and distributions from qualified 
        tuition programs in the same manner as such tax applies to 
        education individual retirement accounts.
            ``(2) Excess contributions returned before due date of 
        return.--Paragraph (1) shall not apply to the distribution to a 
        contributor of any contribution paid during a taxable year to a 
        qualified tuition program to the extent that such contribution 
        exceeds the limitation in section 4973(e) if such distribution 
        (and the net income with respect to such excess contribution) 
        meets requirements comparable to the requirements of clauses 
        (i) and (ii) of section 530(d)(4)(C).''
            (3) Coordination with education credits.--Section 25A(e)(2) 
        of such Code is amended by inserting ``529(c)(3)(B) or'' before 
        ``530(d)(2)''.
            (4) Conforming amendment.--Paragraph (2) of section 26(b) 
        of such Code is amended by redesignating subparagraphs (E) 
        through (Q) as subparagraphs (F) through (R), respectively, and 
        by inserting after subparagraph (D) the following new 
        subparagraph:
                    ``(E) section 529(f) (relating to additional tax on 
                certain distributions from qualified tuition 
                programs),''.
            (5) Effective date.--The amendments made by this subsection 
        shall apply to distributions after December 31, 2000, for 
        education furnished in academic periods beginning after such 
        date.
    (b) Eligible Educational Institutions Permitted To Maintain 
Qualified Tuition Programs.--
            (1) In general.--Paragraph (1) of section 529(b) of such 
        Code (defining qualified State tuition program) is amended by 
        inserting ``or by one or more eligible educational 
        institutions'' after ``maintained by a State or agency or 
        instrumentality thereof''.
            (2) Private qualified tuition programs limited to benefit 
        plans.--Clause (ii) of section 529(b)(1)(A) of such Code is 
        amended by inserting ``in the case of a program established and 
        maintained by a State or agency or instrumentality thereof,'' 
        before ``may make''.
            (3) Conforming amendments.--
                    (A) 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 such 
                Code are each amended by striking ``qualified State 
                tuition'' each place it appears and inserting 
                ``qualified tuition''.
                    (B) 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''.
                    (C) 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''.
                    (D) The heading for section 529 of such Code is 
                amended by striking ``STATE''.
                    (E) The item relating to section 529 in the table 
                of sections for part VIII of subchapter F of chapter 1 
                of such Code is amended by striking ``State''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2000.
    (c) Change of Qualified Tuition Program or of Designated 
Beneficiary.--
            (1) In general.--Clause (i) of section 529(c)(3)(C) of such 
        Code is amended by inserting ``to another qualified tuition 
        program for the benefit of the designated beneficiary or'' 
        after ``transferred''.
            (2) Inclusion of siblings as member of family.--Paragraph 
        (2) of section 529(e) of such Code is amended by striking 
        ``and'' at the end of subparagraph (B), by striking the period 
        at the end of subparagraph (C) and inserting ``; and'', and by 
        adding at the end the following new subparagraph:
                    ``(D) any sibling (whether by the whole or half 
                blood) of the designated beneficiary.''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2000.