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[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 359 Introduced in Senate (IS)]

110th CONGRESS
  1st Session
                                 S. 359

To amend the Higher Education Act of 1965 to provide additional support 
                              to students.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                            January 22, 2007

Mr. Kennedy (for himself, Ms. Mikulski, Mr. Lieberman, Mr. Schumer, Mr. 
 Durbin, and Mr. Obama) introduced the following bill; which was read 
             twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL

 
To amend the Higher Education Act of 1965 to provide additional support 
                              to students.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Student Debt Relief Act of 2007''.

SEC. 2. INCREASE IN FEDERAL PELL GRANTS.

    (a) Program Authority.--Section 401(a)(1) of the Higher Education 
Act of 1965 (20 U.S.C. 1070a(a)(1)) is amended by striking ``2004'' and 
inserting ``2012''.
    (b) Amount of Grants.--Section 401(b)(2)(A) of the Higher Education 
Act of 1965 (20 U.S.C. 1070a(b)(2)(A)) is amended by striking clauses 
(i) through (v) and inserting the following:
            ``(i) $5,100 for academic year 2007-2008;
            ``(ii) $5,400 for academic year 2008-2009;
            ``(iii) $5,700 for academic year 2009-2010;
            ``(iv) $6,000 for academic year 2010-2011; and
            ``(v) $6,300 for academic year 2011-2012,''.
    (c) Additional Funds.--
            (1) In general.--For an academic year, there are authorized 
        to be appropriated, and there are appropriated, to carry out 
        paragraph (2) (in addition to any other amounts appropriated to 
        carry out section 401 of the Higher Education Act of 1965 (20 
        U.S.C. 1070a) and out of any money in the Treasury not 
        otherwise appropriated) as follows:
                    (A) For academic year 2007-2008, $4,331,000,000.
                    (B) For academic year 2008-2009, $5,674,000,000.
                    (C) For academic year 2009-2010, $7,050,000,000.
                    (D) For academic year 2010-2011, $8,452,000,000.
                    (E) For academic year 2011-2012, $9,894,000,000.
            (2) Increase in pell grants.--The amounts made available 
        pursuant to paragraph (1) shall be used to increase the amount 
        of the maximum Federal Pell Grant under section 401 of the 
        Higher Education Act of 1965 (20 U.S.C. 1070a) for which funds 
        are appropriated under appropriations Acts for a fiscal year 
        by--
                    (A) $1,050 for award year 2007-2008;
                    (B) $1,350 for award year 2008-2009;
                    (C) $1,650 for award year 2009-2010;
                    (D) $1,950 for award year 2010-2011; and
                    (E) $2,250 for award year 2011-2012.

SEC. 3. STUDENT AID REWARD PROGRAM.

    Part G of title IV of the Higher Education Act of 1965 (20 U.S.C. 
1088 et seq.) is amended by inserting after section 489 the following:

``SEC. 489A. STUDENT AID REWARD PROGRAM.

    ``(a) Program Authorized.--The Secretary shall carry out a Student 
Aid Reward Program to encourage institutions of higher education to 
participate in the student loan program under this title that is most 
cost-effective for taxpayers.
    ``(b) Program Requirements.--In carrying out the Student Aid Reward 
Program, the Secretary shall--
            ``(1) provide to each institution of higher education 
        participating in the student loan program under this title that 
        is most cost-effective for taxpayers, a Student Aid Reward 
        Payment, in an amount determined in accordance with subsection 
        (c), to encourage the institution to participate in that 
        student loan program;
            ``(2) require each institution of higher education 
        receiving a payment under this section to provide student loans 
        under such student loan program for a period of 5 years after 
        the date the first payment is made under this section;
            ``(3) where appropriate, require that funds paid to 
        institutions of higher education under this section be used to 
        award students a supplement to such students' Federal Pell 
        Grants under subpart 1 of part A;
            ``(4) permit such funds to also be used to award need-based 
        grants to lower- and middle-income graduate students; and
            ``(5) encourage all institutions of higher education to 
        participate in the Student Aid Reward Program under this 
        section.
    ``(c) Amount.--The amount of a Student Aid Reward Payment under 
this section shall be not less than 50 percent of the savings to the 
Federal Government generated by the institution of higher education's 
participation in the student loan program under this title that is most 
cost-effective for taxpayers instead of the institution's participation 
in the student loan program that is not most cost-effective for 
taxpayers.
    ``(d) Trigger To Ensure Cost Neutrality.--
            ``(1) Limit to ensure cost neutrality.--Notwithstanding 
        subsection (c), the Secretary shall not distribute Student Aid 
        Reward Payments under the Student Aid Reward Program that, in 
        the aggregate, exceed the Federal savings resulting from the 
        implementation of the Student Aid Reward Program.
            ``(2) Federal savings.--In calculating Federal savings, as 
        used in paragraph (1), the Secretary shall determine Federal 
        savings on loans made to students at institutions of higher 
        education that participate in the student loan program under 
        this title that is most cost-effective for taxpayers and that, 
        on the date of enactment of this section, participated in the 
        student loan program that is not most cost-effective for 
        taxpayers, resulting from the difference of--
                    ``(A) the Federal cost of loan volume made under 
                the student loan program under this title that is most 
                cost-effective for taxpayers; and
                    ``(B) the Federal cost of an equivalent type and 
                amount of loan volume made, insured, or guaranteed 
                under the student loan program under this title that is 
                not most cost-effective for taxpayers.
            ``(3) Distribution rules.--If the Federal savings 
        determined under paragraph (2) is not sufficient to distribute 
        full Student Aid Reward Payments under the Student Aid Reward 
        Program, the Secretary shall--
                    ``(A) first make Student Aid Reward Payments to 
                those institutions of higher education that 
                participated in the student loan program under this 
                title that is not most cost-effective for taxpayers on 
                the date of enactment of this section; and
                    ``(B) with any remaining Federal savings after 
                making Student Aid Reward Payments under subparagraph 
                (A), make Student Aid Reward Payments to the 
                institutions of higher education eligible for a Student 
                Aid Reward Payment and not described in subparagraph 
                (A) on a pro-rata basis.
            ``(4) Distribution to students.--Any institution of higher 
        education that receives a Student Aid Reward Payment under this 
        section--
                    ``(A) shall distribute, where appropriate, part or 
                all of such payment among the students of such 
                institution who are Federal Pell Grant recipients by 
                awarding such students a supplemental grant; and
                    ``(B) may distribute part of such payment as a 
                supplemental grant to graduate students in financial 
                need.
            ``(5) Estimates, adjustments, and carry over.--
                    ``(A) Estimates and adjustments.--The Secretary 
                shall make Student Aid Reward Payments to institutions 
                of higher education on the basis of estimates, using 
                the best data available at the beginning of an academic 
                or fiscal year. If the Secretary determines thereafter 
                that loan program costs for that academic or fiscal 
                year were different than such estimate, the Secretary 
                shall adjust by reducing or increasing subsequent 
                Student Aid Reward Payments rewards paid to such 
                institutions of higher education to reflect such 
                difference.
                    ``(B) Carry over.--Any institution of higher 
                education that receives a reduced Student Aid Reward 
                Payment under paragraph (3)(B), shall remain eligible 
                for the unpaid portion of such institution's financial 
                reward payment, as well as any additional financial 
                reward payments for which the institution is otherwise 
                eligible, in subsequent academic or fiscal years.
    ``(e) Definition.--In this section:
            ``(1) Student loan program under this title that is most 
        cost-effective for taxpayers.--The term `student loan program 
        under this title that is most cost-effective for taxpayers' 
        means the loan program under part B or D of this title that has 
        the lowest overall cost to the Federal Government (including 
        administrative costs) for the loans authorized by such parts.
            ``(2) Student loan program under this title that is not 
        most cost-effective for taxpayers.--The term `student loan 
        program under this title that is not most cost-effective for 
        taxpayers' means the loan program under part B or D of this 
        title that does not have the lowest overall cost to the Federal 
        Government (including administrative costs) for the loans 
        authorized by such parts.''.

SEC. 4. INTEREST RATE REDUCTIONS.

    (a) FFEL Interest Rates.--
            (1) Section 427A(l) of the Higher Education Act of 1965 (20 
        U.S.C. 1077a(l)) is amended by adding at the end the following:
            ``(4) Reduced rates for undergraduate subsidized loans.--
        Notwithstanding subsection (h) and paragraph (1) of this 
        subsection, with respect to any loan to an undergraduate 
        student made, insured, or guaranteed under this part (other 
        than a loan made pursuant to section 428B, 428C, or 428H) for 
        which the first disbursement is made on or after July 1, 2006, 
        and before July 1, 2012, the applicable rate of interest shall 
        be as follows:
                    ``(A) For a loan for which the first disbursement 
                is made on or after July 1, 2006, and before July 1, 
                2007, 6.8 percent on the unpaid principal balance of 
                the loan.
                    ``(B) For a loan for which the first disbursement 
                is made on or after July 1, 2007, and before July 1, 
                2008, 6.12 percent on the unpaid principal balance of 
                the loan.
                    ``(C) For a loan for which the first disbursement 
                is made on or after July 1, 2008, and before July 1, 
                2009, 5.44 percent on the unpaid principal balance of 
                the loan.
                    ``(D) For a loan for which the first disbursement 
                is made on or after July 1, 2009, and before July 1, 
                2010, 4.76 percent on the unpaid principal balance of 
                the loan.
                    ``(E) For a loan for which the first disbursement 
                is made on or after July 1, 2010, and before July 1, 
                2011, 4.08 percent on the unpaid principal balance of 
                the loan.
                    ``(F) For a loan for which the first disbursement 
                is made on or after July 1, 2011, and before July 1, 
                2012, 3.40 percent on the unpaid principal balance of 
                the loan.''.
            (2) Special allowance cross reference.--Section 
        438(b)(2)(I)(ii)(II) of such Act is amended by striking 
        ``section 427A(l)(1)'' and inserting ``section 427A(l)(1) or 
        (l)(4)''.
    (b) Direct Loan Interest Rates.--Section 455(b)(7) of the Higher 
Education Act of 1965 (20 U.S.C. 1087e(b)(7)) is amended by adding at 
the end the following:
                    ``(D) Reduced rates for undergraduate fdsl.--
                Notwithstanding the preceding paragraphs of this 
                subsection, for Federal Direct Stafford Loans made to 
                undergraduate students for which the first disbursement 
                is made on or after July 1, 2006, and before July 1, 
                2012, the applicable rate of interest shall be as 
                follows:
                            ``(i) For a loan for which the first 
                        disbursement is made on or after July 1, 2006, 
                        and before July 1, 2007, 6.8 percent on the 
                        unpaid principal balance of the loan.
                            ``(ii) For a loan for which the first 
                        disbursement is made on or after July 1, 2007, 
                        and before July 1, 2008, 6.12 percent on the 
                        unpaid principal balance of the loan.
                            ``(iii) For a loan for which the first 
                        disbursement is made on or after July 1, 2008, 
                        and before July 1, 2009, 5.44 percent on the 
                        unpaid principal balance of the loan.
                            ``(iv) For a loan for which the first 
                        disbursement is made on or after July 1, 2009, 
                        and before July 1, 2010, 4.76 percent on the 
                        unpaid principal balance of the loan.
                            ``(v) For a loan for which the first 
                        disbursement is made on or after July 1, 2010, 
                        and before July 1, 2011, 4.08 percent on the 
                        unpaid principal balance of the loan.
                            ``(vi) For a loan for which the first 
                        disbursement is made on or after July 1, 2011, 
                        and before July 1, 2012, 3.40 percent on the 
                        unpaid principal balance of the loan.''.

SEC. 5. INCOME CONTINGENT REPAYMENT FOR PUBLIC SECTOR EMPLOYEES.

    Section 455(e) of the Higher Education Act of 1965 (20 U.S.C. 
1087e(e)) is amended by adding at the end the following:
            ``(7) Repayment plan for public sector employees.--
                    ``(A) In general.--The Secretary shall forgive the 
                balance due on any loan made under this part or section 
                428C(b)(5) for a borrower--
                            ``(i) who has made 120 payments on such 
                        loan pursuant to income contingent repayment; 
                        and
                            ``(ii) who is employed, and was employed 
                        for the 10-year period in which the borrower 
                        made the 120 payments described in clause (i), 
                        in a public sector job.
                    ``(B) Public sector job.--In this paragraph, the 
                term `public sector job' means a full-time job in 
                emergency management, government, public safety, law 
                enforcement, public health, education (including early 
                childhood education), social work in a public child or 
                family service agency, or public interest legal 
                services (including prosecution or public defense).
            ``(8) Return to standard repayment.--A borrower who is 
        repaying a loan made under this part pursuant to income 
        contingent repayment may choose, at any time, to terminate 
        repayment pursuant to income contingent repayment and repay 
        such loan under the standard repayment plan.''.

SEC. 6. FAIR PAYMENT ASSURANCE.

    (a) Amendment.--Part G of title IV of the Higher Education Act of 
1965 (20 U.S.C. 1088 et seq.) is further amended by adding at the end 
the following:

``SEC. 493C. FAIR PAYMENT ASSURANCE.

    ``(a) Definitions.--In this section:
            ``(1) Excepted plus loan.--The term `excepted PLUS loan' 
        means a loan under section 428B, or a Federal Direct PLUS Loan, 
        that is made, insured, or guaranteed on behalf of a dependent 
        student.
            ``(2) Partial financial hardship.--The term `partial 
        financial hardship' means the amount by which the annual amount 
        due on the total amount of loans made, insured, or guaranteed 
        under part B or D (other than an excepted PLUS loan) to a 
        borrower as calculated under the standard repayment plan under 
        section 428(b)(9)(A)(i) or 455(d)(1)(A) exceeds 15 percent of 
        the result obtained by calculating the amount by which--
                    ``(A) the borrower's adjusted gross income; exceeds
                    ``(B) 150 percent of the poverty line applicable to 
                the borrower's family size as determined under section 
                673(2) of the Community Services Block Grant Act.
    ``(b) Fair Payment Assurance Program Authorized.--Notwithstanding 
any other provision of this Act, the Secretary shall carry out a 
program under which--
            ``(1) a borrower of any loan made, insured or guaranteed 
        under part B or D (other than an excepted PLUS loan) who has a 
        partial financial hardship may elect, during any period the 
        borrower has the partial financial hardship, to have the 
        borrower's aggregate monthly payment for all such loans not 
        exceed 15 percent of the result described in subsection (a)(2) 
        divided by 12;
            ``(2) the holder of such a loan shall apply the borrower's 
        monthly payment under this subsection first toward interest due 
        on the loan and then toward the principal of the loan;
            ``(3) any interest due and not paid under paragraph (2)--
                    ``(A) in the case of a Federal Stafford Loan or 
                Federal Direct Stafford Loan, shall be paid by the 
                Secretary; or
                    ``(B) in the case of any other loan under part B or 
                D (other than a loan described in subparagraph (A) or 
                an excepted PLUS loan), shall be capitalized;
            ``(4) any principal due and not paid under paragraph (2) 
        shall be deferred in the same manner as deferments under 
        section 428(b)(1)(M);
            ``(5) the amount of time the borrower makes monthly 
        payments under paragraph (1) may exceed 10 years;
            ``(6) if the borrower no longer has a partial financial 
        hardship or no longer wishes to continue the election under 
        this subsection, then--
                    ``(A) the maximum monthly payment required to be 
                paid for all loans made to the borrower under part B or 
                D (other than an excepted PLUS loan) shall not exceed 
                the monthly amount calculated under section 
                428(b)(9)(A)(i) or 455(d)(1)(A) when the borrower first 
                made the election described in this subsection; and
                    ``(B) the amount of time the borrower is permitted 
                to repay such loans may exceed 10 years; and
            ``(7) the Secretary shall repay or cancel any outstanding 
        balance of principal and interest due on all loans made under 
        part B or D (other than an excepted PLUS Loan) to a borrower 
        who--
                    ``(A) is in deferment due to an economic hardship 
                described in section 435(o) for a period of time 
                prescribed by the Secretary, not to exceed 25 years; or
                    ``(B)(i) makes the election under this subsection; 
                and
                    ``(ii) for a period of time prescribed by the 
                Secretary, not to exceed 25 years (including any period 
                during which the borrower is in deferment due to an 
                economic hardship described in section 435(o)), meets 
                any 1 or more of the following requirements:
                            ``(I) Has made reduced monthly payments 
                        under paragraph (1).
                            ``(II) Has made monthly payments of not 
                        less than the monthly amount calculated under 
                        section 428(b)(9)(A)(i) or 455(d)(1)(A) when 
                        the borrower first made the election described 
                        in this subsection.
                            ``(III) Has made payments under a standard 
                        repayment plan under section 428(b)(9)(A)(i) or 
                        455(d)(1)(A).
                            ``(IV) Has made payments under an income 
                        contingent repayment plan under section 
                        455(d)(1)(D).''.
    (b) Conforming ICR Amendment.--Section 455(d)(1)(D) of the Higher 
Education Act of 1965 (20 U.S.C. 1087e(d)(1)(D)) is amended by 
inserting ``made on behalf of a dependent student'' after ``PLUS 
loan''.

SEC. 7. DEFINITION OF ECONOMIC HARDSHIP.

    Section 435(o) of the Higher Education Act of 1965 (20 U.S.C. 
1085(o)) is amended--
            (1) in paragraph (1)--
                    (A) in subparagraph (A)(ii), by striking ``100 
                percent of the poverty line for a family of 2'' and 
                inserting ``150 percent of the poverty line applicable 
                to the borrower's family size'';
                    (B) by striking subparagraph (B); and
                    (C) by redesignating subparagraph (C) as 
                subparagraph (B); and
            (2) in paragraph (2), by striking ``(1)(C)'' and inserting 
        ``(1)(B)''.

SEC. 8. DEFERRALS.

    (a) FISL.--Section 427(a)(2)(C)(iii) of the Higher Education Act of 
1965 (20 U.S.C. 1077(a)(2)(C)(iii)) is amended by striking ``not in 
excess of 3 years''.
    (b) Interest Subsidies.--Section 428(b)(1)(M)(iv) of the Higher 
Education Act of 1965 (20 U.S.C. 1078(b)(1)(M)(iv)) is amended by 
striking ``not in excess of 3 years''.
    (c) Direct Loans.--Section 455(f)(2)(D) of the Higher Education Act 
of 1965 (20 U.S.C. 1087e(f)(2)(D)) is amended by striking ``not in 
excess of 3 years''.
    (d) Perkins.--Section 464(c)(2)(A)(iv) of the Higher Education Act 
of 1965 (20 U.S.C. 1087dd(c)(2)(A)(iv)) is amended by striking ``not in 
excess of 3 years''.

SEC. 9. MAXIMUM REPAYMENT PERIOD.

    (a) In General.--Section 455(e) of the Higher Education Act of 1965 
(20 U.S.C. 1087e(e)) is amended by adding at the end the following:
            ``(7) Maximum repayment period.--In calculating the 
        extended period of time for which an income contingent 
        repayment plan under this subsection may be in effect for a 
        borrower, the Secretary shall include all time periods during 
        which a borrower of loans under part B, part D, or part E--
                    ``(A) is not in default on any loan that is 
                included in the income contingent repayment plan; and
                    ``(B)(i) is in deferment due to an economic 
                hardship described in section 435(o);
                    ``(ii) makes monthly payments under paragraph (1) 
                or (6) of section 493C(b); or
                    ``(iii) makes payments under a standard repayment 
                plan described in section 428(b)(9)(A)(i) or subsection 
                (d)(1)(A).''.
    (b) Technical Correction.--Section 455(d)(1)(C) (20 U.S.C. 
1087e(d)(1)(C)) is amended by striking ``428(b)(9)(A)(v)'' and 
inserting ``428(b)(9)(A)(iv)''.

SEC. 10. IN-SCHOOL CONSOLIDATION.

    Section 428(b)(7)(A) of the Higher Education Act of 1965 (20 U.S.C. 
1078(b)(7)(A)) is amended by striking ``shall begin'' and all that 
follows through the period and inserting ``shall begin--
                    ``(i) the day after 6 months after the date the 
                student ceases to carry at least one-half the normal 
                full-time academic workload (as determined by the 
                institution); or
                    ``(ii) on an earlier date if the borrower requests 
                and is granted a repayment schedule that provides for 
                repayment to commence at an earlier date.''.

SEC. 11. CONSOLIDATION LOAN CHANGES.

    Section 428C(a)(3) of the Higher Education Act of 1965 (20 U.S.C. 
1078-3(a)(3)) is amended to read as follows:
            ``(3) Definition of eligible borrower.--For the purpose of 
        this section, the term `eligible borrower' means a borrower 
        who--
                    ``(A) is not subject to a judgment secured through 
                litigation with respect to a loan under this title or 
                to an order for wage garnishment under section 488A; 
                and
                    ``(B) at the time of application for a 
                consolidation loan--
                            ``(i) is in repayment status as determined 
                        under section 428(b)(7)(A);
                            ``(ii) is in a grace period preceding 
                        repayment; or
                            ``(iii) is a defaulted borrower who has 
                        made arrangements to repay the obligation on 
                        the defaulted loans satisfactory to the holders 
                        of the defaulted loans.''.

SEC. 12. REDUCTION OF DIRECT LOAN ORIGINATION FEES.

    Section 455(c) of the Higher Education Act of 1965 (20 U.S.C. 
1087e(c)) is amended--
            (1) in paragraph (1)--
                    (A) by striking ``4.0 percent'' and inserting ``3.0 
                percent''; and
                    (B) by striking ``shall'' and inserting ``is 
                authorized to''; and
            (2) in paragraph (2)--
                    (A) in subparagraph (A), by striking ```3.0 
                percent' for `4.0 percent''' and inserting ```2.0 
                percent' for `3.0 percent''';
                    (B) in subparagraph (B), by striking ```2.5 
                percent' for `4.0 percent''' and inserting ```1.5 
                percent' for `3.0 percent''';
                    (C) in subparagraph (C), by striking ```2.0 
                percent' for `4.0 percent''' and inserting ```1.0 
                percent' for `3.0 percent''';
                    (D) in subparagraph (D), by striking ```1.5 
                percent' for `4.0 percent''' and inserting ```0.5 
                percent' for `3.0 percent'''; and
                    (E) in subparagraph (E), by striking ```1.0 
                percent' for `4.0 percent''' and inserting ```0.0 
                percent' for `3.0 percent'''.

SEC. 13. ADMINISTRATIVE ACCOUNT FOR DIRECT LOAN PROGRAM.

    Section 458 of the Higher Education Act of 1965 (20 U.S.C. 1087h) 
is amended--
            (1) in subsection (a)--
                    (A) by striking paragraphs (2) and (3) and 
                inserting the following:
            ``(2) Mandatory funds for fiscal years 2007 through 2011.--
        Each fiscal year there shall be available to the Secretary, 
        from funds not otherwise appropriated, funds to be obligated 
        for--
                    ``(A) administrative costs under this part and part 
                B, including the costs of the direct student loan 
                programs under this part; and
                    ``(B) account maintenance fees payable to guaranty 
                agencies under part B and calculated in accordance with 
                subsection (b),
        not to exceed (from such funds not otherwise appropriated) 
        $904,000,000 (less any amounts previously appropriated for the 
        costs and fees described this paragraph for fiscal year 2007) 
        for fiscal year 2007, $943,000,000 for fiscal year 2008, 
        $983,000,000 for fiscal year 2009, $1,023,000,000 for fiscal 
        year 2010, $1,064,000,000 for fiscal year 2011, and 
        $1,106,000,000 for fiscal year 2012.'';
                    (B) by redesignating paragraphs (4) and (5) as 
                paragraphs (3) and (4), respectively; and
                    (C) in paragraph (3) (as redesignated in 
                subparagraph (B)), by striking ``paragraph (3)'' and 
                inserting ``paragraph (2)''; and
            (2) in subsection (b), by striking ``(a)(3)'' and inserting 
        ``(a)(2)''.

SEC. 14. COLLEGE TUITION DEDUCTION AND CREDIT FOR INTEREST ON HIGHER 
              EDUCATION LOANS.

    (a) Expansion of Deduction for Higher Education Expenses.--
            (1) Amount of deduction.--Subsection (b) of section 222 of 
        the Internal Revenue Code of 1986 (relating to deduction for 
        qualified tuition and related expenses) is amended to read as 
        follows:
    ``(b) Limitations.--
            ``(1) Dollar limitations.--
                    ``(A) In general.--Except as provided in paragraph 
                (2), the amount allowed as a deduction under subsection 
                (a) with respect to the taxpayer for any taxable year 
                shall not exceed the applicable dollar limit.
                    ``(B) Applicable dollar limit.--The applicable 
                dollar limit for any taxable year shall be determined 
                as follows:

                                                             Applicable
``Taxable year:                                          dollar amount:
    2007..........................................              $8,000 
    2008 and thereafter...........................             $12,000.
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--The amount which would (but for 
                this paragraph) be taken into account under subsection 
                (a) shall be reduced (but not below zero) by the amount 
                determined under subparagraph (B).
                    ``(B) Amount of reduction.--The amount determined 
                under this subparagraph equals the amount which bears 
                the same ratio to the amount which would be so taken 
                into account as--
                            ``(i) the excess of--
                                    ``(I) the taxpayer's modified 
                                adjusted gross income for such taxable 
                                year, over
                                    ``(II) $65,000 ($130,000 in the 
                                case of a joint return), bears to
                            ``(ii) $15,000 ($30,000 in the case of a 
                        joint return).
                    ``(C) Modified adjusted gross income.--For purposes 
                of this paragraph, the term `modified adjusted gross 
                income' means the adjusted gross income of the taxpayer 
                for the taxable year determined--
                            ``(i) without regard to this section and 
                        sections 199, 911, 931, and 933, and
                            ``(ii) after the application of sections 
                        86, 135, 137, 219, 221, and 469.
                For purposes of the sections referred to in clause 
                (ii), adjusted gross income shall be determined without 
                regard to the deduction allowed under this section.
                    ``(D) Inflation adjustments.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning in a calendar year after 
                        2007, both of the dollar amounts in 
                        subparagraph (B)(i)(II) shall be increased by 
                        an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                the taxable year begins, by 
                                substituting `calendar year 2006' 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.''.
            (2) Qualified tuition and related expenses of eligible 
        students.--
                    (A) In general.--Section 222(a) of the Internal 
                Revenue Code of 1986 (relating to allowance of 
                deduction) is amended by inserting ``of eligible 
                students'' after ``expenses''.
                    (B) Definition of eligible student.--Section 222(d) 
                of such Code (relating to definitions and special 
                rules) is amended by redesignating paragraphs (2) 
                through (6) as paragraphs (3) through (7), 
                respectively, and by inserting after paragraph (1) the 
                following new paragraph:
            ``(2) Eligible student.--The term `eligible student' has 
        the meaning given such term by section 25A(b)(3).''.
            (3) Deduction made permanent.--Title IX of the Economic 
        Growth and Tax Relief Reconciliation Act of 2001 (relating to 
        sunset of provisions of such Act) shall not apply to the 
        amendments made by section 431 of such Act.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to payments made in taxable years beginning after 
        December 31, 2006.
    (b) Credit for Interest on Higher Education Loans.--
            (1) In general.--Subpart A of part IV of subchapter A of 
        chapter 1 of the Internal Revenue Code of 1986 (relating to 
        nonrefundable personal credits) is amended by inserting after 
        section 25D the following new section:

``SEC. 25E. INTEREST ON HIGHER EDUCATION LOANS.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year an amount equal to the interest paid by the 
taxpayer during the taxable year on any qualified education loan.
    ``(b) Maximum Credit.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        credit allowed by subsection (a) for the taxable year shall not 
        exceed $1,500.
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--If the modified adjusted gross 
                income of the taxpayer for the taxable year exceeds 
                $50,000 ($100,000 in the case of a joint return), the 
                amount which would (but for this paragraph) be 
                allowable as a credit under this section shall be 
                reduced (but not below zero) by the amount which bears 
                the same ratio to the amount which would be so 
                allowable as such excess bears to $20,000 ($40,000 in 
                the case of a joint return).
                    ``(B) Modified adjusted gross income.--The term 
                `modified adjusted gross income' means adjusted gross 
                income determined without regard to sections 199, 222, 
                911, 931, and 933.
                    ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning after 2007, the $50,000 and 
                $100,000 amounts referred to in subparagraph (A) shall 
                be increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section (1)(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        by substituting `2006' for `1992'.
                    ``(D) Rounding.--If any amount as adjusted under 
                subparagraph (C) is not a multiple of $50, such amount 
                shall be rounded to the nearest multiple of $50.
    ``(c) Dependents Not Eligible for Credit.--No credit shall be 
allowed by this section to an individual for the taxable year if a 
deduction under section 151 with respect to such individual is allowed 
to another taxpayer for the taxable year beginning in the calendar year 
in which such individual's taxable year begins.
    ``(d) Limit on Period Credit Allowed.--A credit shall be allowed 
under this section only with respect to interest paid on any qualified 
education loan during the first 60 months (whether or not consecutive) 
in which interest payments are required. For purposes of this 
paragraph, any loan and all refinancings of such loan shall be treated 
as 1 loan.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Qualified education loan.--The term `qualified 
        education loan' has the meaning given such term by section 
        221(d)(1).
            ``(2) Dependent.--The term `dependent' has the meaning 
        given such term by section 152.
    ``(f) Special Rules.--
            ``(1) Denial of double benefit.--No credit shall be allowed 
        under this section for any amount taken into account for any 
        deduction under any other provision of this chapter.
            ``(2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, the 
        credit shall be allowed under subsection (a) only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(3) Marital status.--Marital status shall be determined 
        in accordance with section 7703.''.
            (2) Conforming amendment.--The table of sections for 
        subpart A of part IV of subchapter A of chapter 1 of the 
        Internal Revenue Code of 1986 is amended by inserting after the 
        item relating to section 25D the following new item:

``Sec. 25E. Interest on higher education loans.''.
            (3) Effective date.--The amendments made by this section 
        shall apply to any qualified education loan (as defined in 
        section 25E(e)(1) of the Internal Revenue Code of 1986, as 
        added by this section) incurred on, before, or after the date 
        of the enactment of this Act, but only with respect to any loan 
        interest payment due after December 31, 2006.
                                 <all>
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