To amend the Internal Revenue Code of 1986 to restore the deduction for interest on certain educational loans.

SECTION 1. RESTORATION OF DEDUCTION FOR INTEREST ON EDUCATIONAL LOANS.

    (a) In General.--Paragraph (2) of section 163(h) of the Internal 
Revenue Code of 1986 (defining personal interest) is amended by 
striking ``and'' at the end of subparagraph (D), by redesignating 
subparagraph (E) as subparagraph (F), and by inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E) any interest on a qualified educational loan 
                (within the meaning of paragraph (5)), and''.
    (b) Qualified Educational Loan Defined.--Paragraph (5) of section 
163(h) of such Code is amended to read as follows:
            ``(5) Qualified educational loan.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `qualified educational 
                loan' means any indebtedness--
                            ``(i) which is provided--
                                    ``(I) pursuant to a Federal, State, 
                                or State-based guarantee program or 
                                insurance program,
                                    ``(II) by an organization described 
                                in section 501(c)(3) and exempt from 
                                tax under section 501(a), or
                                    ``(III) by a financial institution 
                                under a supplemental education program 
                                which requires that repayments on the 
                                loan be made to the educational 
                                institution referred to in subparagraph 
                                (D)(i), and
                            ``(ii) which is incurred to pay qualified 
                        educational expenses which are paid or incurred 
                        within a reasonable period of time before or 
                        after the indebtedness is incurred.
                    ``(B) Phaseout of benefit.--
                            ``(i) In general.--The amount of interest 
                        which would (but for this subparagraph) be 
                        taken into account under paragraph (2)(E) for 
                        the taxable year shall be reduced (but not 
                        below zero) by the amount which bears the same 
                        ratio to such interest as the excess of the 
                        taxpayer's adjusted gross income for such 
                        taxable year over the applicable dollar amount 
                        bears to phaseout range.
                            ``(ii) Applicable dollar amount; phaseout 
                        range.--For purposes of clause (i)--
                                    ``(I) in the case of a return of an 
                                unmarried individual, the applicable 
                                dollar amount is $40,000 and the 
                                phaseout range is $15,000,
                                    ``(II) in the case of a joint 
                                return, the applicable dollar amount is 
                                $60,000 and the phaseout range is 
                                $30,000, and
                                    ``(III) in any other case, the 
                                applicable dollar amount is zero.
                    ``(C) Deduction allowable only for first 48 months 
                loan is in repayment status.--Paragraph (2)(E) shall 
                apply only to interest which is paid or incurred during 
                the first 48 months (whether or not consecutive) for 
                which a payment is required to be made on the loan.
                    ``(D) Qualified educational expenses.--For purposes 
                of this paragraph--
                            ``(i) In general.--The term `qualified 
                        educational expenses' means qualified tuition 
                        and related expenses of the taxpayer, his 
                        spouse, or a dependent (as defined in section 
                        152) for attendance at an educational 
                        institution described in section 
                        170(b)(1)(A)(ii).
                            ``(ii) Qualified tuition and related 
                        expenses.--The term `qualified tuition and 
                        related expenses' has the meaning given such 
                        term by section 117(b), except that such term 
                        shall include any reasonable living expenses 
                        while away from home.
                    ``(E) Adjustment of phaseout for inflation.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning in a calendar year after 
                        1998, the $40,000 and $60,000 amounts contained 
                        in subparagraph (B) shall be increased by an 
                        amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment under section 1(f)(3) for 
                                the calendar year in which the taxable 
                                year begins, determined by substituting 
                                `calendar year 1997' for `calendar year 
                                1992' in subparagraph (B) thereof.
                            ``(ii) Rounding.--If any amount as adjusted 
                        under clause (i) is not a multiple of $50, such 
                        amount shall be rounded to the nearest multiple 
                        of $50 (or, if such amount is a multiple of 
                        $25, such amount shall be rounded to the next 
                        highest multiple of $50).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997, but only with 
respect to loans the first required payment on which is after such 
date.

Summary: Amends the Internal Revenue Code to allow a limited income tax deduction for interest on a qualified educational loan. Defines such a loan.