I
105TH CONGRESS
1ST SESSION
H. R. 1627
To amend the Internal Revenue Code of 1986 to provide tax incentives
for higher education.
IN THE HOUSE OF REPRESENTATIVES
MAY 15, 1997
Mrs. JOHNSON of Connecticut (for herself, Mr. SHAYS, Mr. CAMP, Mr. ENG-
LISH of Pennsylvania, and Mr. MCCRERY) introduced the following bill;
which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
tax incentives for higher education.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Higher Education Access and Affordability Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. MODIFICATIONS OF TAX TREATMENT OF QUALI-
FIED STATE TUITION PROGRAMS.
(a) EXCLUSION OF DISTRIBUTIONS USED FOR EDU-
CATIONAL
PURPOSES.—Subparagraph (B) of section
529(c)(3) is amended to read as follows:
‘‘(B) 
DISTRIBUTIONS
FOR
QUALIFIED
HIGHER
EDUCATION
EXPENSES.—Subpara-
graph (A) shall not apply to any distribution to
the extent—
‘‘(i) the distribution is used exclusively
to pay qualified higher education expenses
of the distributee, or
‘‘(ii) the distribution consists of pro-
viding a benefit to the distributee which, if
paid for by the distributee, would con-
stitute payment of a qualified higher edu-
cation expense.’’
(b) QUALIFIED HIGHER EDUCATION EXPENSES TO
INCLUDE
ROOM
AND
BOARD.—Section 529(e)(3) is
amended to read as follows:
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the cost of attendance (within the
meaning of section 472 of the Higher Education Act
of 1965 (20 U.S.C. 1087ll), as in effect on the date
of the enactment of the Higher Education Access
and Affordability Act of 1997) of a designated bene-
ficiary at an eligible educational institution (as de-
fined in section 135(c)(3)).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
SEC. 3. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE
PROGRAMS.
(a) PERMANENT EXTENSION.—Section 127 (relating
to exclusion for educational assistance programs) is
amended by striking subsection (d) and by redesignating
subsection (e) as subsection (d).
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1996.
SEC. 4. DEDUCTION FOR INTEREST ON EDUCATION LOANS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 (relating to additional itemized deductions for indi-
viduals) is amended by redesignating section 221 as sec-
tion 222 and by inserting after section 220 the following
new section:
‘‘SEC. 221. INTEREST ON EDUCATION LOANS.
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an
individual, there shall be allowed as a deduction for the
taxable year an amount equal to the interest paid by the
taxpayer during the taxable year on any qualified edu-
cation loan.
‘‘(b) MAXIMUM DEDUCTION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the deduction allowed by subsection (a)
for the taxable year shall not exceed $2,500.
‘‘(2) LIMITATION
BASED
ON
MODIFIED
AD-
JUSTED GROSS INCOME.—
‘‘(A) IN
GENERAL.—If the modified ad-
justed gross income of the taxpayer for the tax-
able year exceeds $45,000 ($65,000 in the case
of a joint return), the amount which would (but
for this paragraph) be allowable as a deduction
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 al-
lowable as such excess bears to $20,000.
‘‘(B) MODIFIED
ADJUSTED
GROSS
IN-
COME.—The term ‘modified adjusted gross in-
come’ means adjusted gross income deter-
mined—
‘‘(i) without regard to this section and
sections 135, 911, 931, and 933, and
‘‘(ii) after application of sections 86,
219, and 469.
For purposes of sections 86, 135, 219, and
469, adjusted gross income shall be determined
without regard to the deduction allowed under
this section.
‘‘(C) INFLATION
ADJUSTMENT.—In the
case of any taxable year beginning after 1997,
the $45,000 and $65,000 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 de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, by substituting ‘1996’ for ‘1992’.
‘‘(D) ROUNDING.—If any amount as ad-
justed 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 DEDUC-
TION.—No deduction shall be allowed by this section to
an individual for the taxable year if a deduction under sec-
tion 151 with respect to such individual is allowed to an-
other taxpayer for the taxable year beginning in the cal-
endar year in which such individual’s taxable year begins.
‘‘(d) LIMIT ON PERIOD DEDUCTION ALLOWED.—A
deduction shall be allowed under this section only with re-
spect to interest paid on any qualified education loan dur-
ing 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’ means any indebtedness
incurred to pay qualified higher education ex-
penses—
‘‘(A) which are incurred on behalf of the
taxpayer, the taxpayer’s spouse, or any depend-
ent of the taxpayer as of the time the indebted-
ness was incurred,
‘‘(B) which are paid or incurred within a
reasonable period of time before or after the in-
debtedness is incurred, and
‘‘(C) which are attributable to education
furnished during a period during which the re-
cipient was at least a half-time student.
Such term includes indebtedness used to refinance
indebtedness which qualifies as a qualified education
loan. The term ‘qualified education loan’ shall not
include any indebtedness owed to a person who is re-
lated (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer.
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the cost of attendance (as defined in
section 472 of the Higher Education Act of 1965,
20 U.S.C. 1087ll, as in effect on the day before the
date of the enactment of the Higher Education Ac-
cess and Affordability Act of 1997) at an eligible
educational institution, reduced by the sum of—
‘‘(A) the amount excluded from gross in-
come under section 135 by reason of such ex-
penses,
‘‘(B) the amount of the reduction de-
scribed in section 135(d)(1), and
‘‘(C) the amount distributed from an indi-
vidual retirement plan if no penalty is imposed
by section 72(t) on such amount by reason of
such expenses.
For purposes of the preceding sentence, the term ‘el-
igible educational institution’ has the same meaning
given such term by section 135(c)(3), except that
such term shall also include an institution conduct-
ing an internship or residency program leading to a
degree or certificate awarded by an institution of
higher education, a hospital, or a health care facility
which offers postgraduate training.
‘‘(3) HALF-TIME
STUDENT.—The term ‘half-
time student’ means any individual who would be a
student as defined in section 151(c)(4) if ‘half-time’
were substituted for ‘full-time’ each place it appears
in such section.
‘‘(4) DEPENDENT.—The term ‘dependent’ has
the meaning given such term by section 152.
‘‘(f) SPECIAL RULES.—
‘‘(1) DENIAL OF DOUBLE BENEFIT.—No deduc-
tion shall be allowed under this section for any
amount for which a deduction is allowable under any
other provision of this chapter.
‘‘(2) CERTAIN RULES TO APPLY.—Rules similar
to the rules of subsections (d) and (e) of section 32
shall apply for purposes of this section.’’
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
of section 62 is amended by inserting after paragraph (16)
the following new paragraph:
‘‘(17) INTEREST ON EDUCATION LOANS.—The
deduction allowed by section 221.’’
(c) REPORTING REQUIREMENT.—
(1) IN GENERAL.—Subpart B of part III of
subchapter A of chapter 61 (relating to information
concerning transactions with other persons) is
amended by inserting after section 6050R the fol-
lowing new section:
‘‘SEC. 6050S. RETURNS RELATING TO EDUCATION LOAN IN-
TEREST RECEIVED IN TRADE OR BUSINESS
FROM INDIVIDUALS.
‘‘(a) EDUCATION LOAN INTEREST
OF $600 OR
MORE.—Any person—
‘‘(1) who is engaged in a trade or business, and
‘‘(2) who, in the course of such trade or busi-
ness, receives from any individual interest aggregat-
ing $600 or more for any calendar year on 1 or
more qualified education loans,
shall make the return described in subsection (b) with re-
spect to each individual from whom such interest was re-
ceived at such time as the Secretary may by regulations
prescribe.
‘‘(b) FORM AND MANNER OF RETURNS.—A return
is described in this subsection if such return—
‘‘(d) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required to be set forth in such return a written state-
ment showing—
‘‘(1) the name and address of the person re-
quired to make such return and the phone number
of the information contract of such person, and
‘‘(2) the aggregate amount of interest described
in subsection (a)(2) received by the person required
to make such return from the individual to whom
the statement is required to be furnished.
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the
year following the calendar year for which the return
under subsection (a) was required to be made.
‘‘(e) QUALIFIED EDUCATION LOAN DEFINED.—For
purposes of this section, except as provided in regulations
prescribed by the Secretary, the term ‘qualified education
loan’ has the meaning given such term by section
221(e)(1).
‘‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE
MADE BY 2 OR MORE PERSONS.—Except to the extent
provided in regulations prescribed by the Secretary, in the
case of interest received by any person on behalf of an-
other person, only the person first receiving such interest
shall be required to make the return under subsection
(a).’’.
(2) ASSESSABLE PENALTIES.—Section 6724(d)
(relating to definitions) is amended—
(A) in paragraph (1)(B), by redesignating
clauses (x) through (xv) as clauses (xi) through
(xvi), respectively, and by inserting after clause
(ix) the following new clause:
‘‘(x) section 6050S (relating to re-
turns relating to education loan interest re-
ceived in trade or business from individ-
uals),’’, and
(B) in paragraph (2), by striking ‘‘or’’ at
the end of the next to last subparagraph, by
striking the period at the end of the last sub-
paragraph and inserting ‘‘, or’’, and by adding
at the end the following new subparagraph:
‘‘(Z) section 6050S(d) (relating to returns
relating to education loan interest received in
trade or business from individuals).’’
(d) CLERICAL AMENDMENT.—The table of sections
for part VII of subchapter B of chapter 1 is amended by
striking the last item and inserting the following new
items:
‘‘Sec. 221. Interest on education loans.
‘‘Sec. 222. Cross reference.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to any qualified education loan (as
defined in section 221(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, 1996.
SEC. 5. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL
RETIREMENT 
PLANS 
FOR 
HIGHER 
EDU-
CATION EXPENSES.
(a) IN GENERAL.—Paragraph (2) of section 72(t)
(relating to exceptions to 10-percent additional tax on
early distributions from qualified retirement plans) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL
RETIREMENT PLANS FOR HIGHER EDUCATION
EXPENSES.—Distributions 
to 
an 
individual
from an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable
year.’’
(b) QUALIFIED HIGHER EDUCATION EXPENSES.—
Section 72(t) is amended by adding at the end the follow-
ing new paragraph:
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means the cost of
attendance (as defined in section 472 of the
Higher Education Act of 1965, 20 U.S.C.
1087ll, as in effect on the day before the date
of the enactment of the Higher Education Ac-
cess and Affordability Act of 1997) of—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any child (as defined in section
151(c)(3)), grandchild, or ancestor of the
taxpayer or the taxpayer’s spouse,
at an eligible educational institution (as defined
in section 135(c)(3)).
‘‘(B) COORDINATION WITH OTHER PROVI-
SIONS.—The amount of qualified higher edu-
cation expenses for any taxable year shall be re-
duced by the sum of—
‘‘(i) the amount excluded from gross
income under section 135 by reason of
such expenses, and
‘‘(ii) the amount of the reduction de-
scribed in section 135(d)(1).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions after the date of
the enactment of this Act.
SEC. 6. EDUCATION INVESTMENT ACCOUNTS.
(a) IN GENERAL.—Part VIII of subchapter F of
chapter 1 (relating to qualified State tuition programs)
is amended by adding at the end the following new section:
‘‘SEC. 530. EDUCATION INVESTMENT ACCOUNTS.
‘‘(a) GENERAL RULE.—An education investment ac-
count shall be exempt from taxation under this subtitle.
Notwithstanding the preceding sentence, the education in-
vestment account shall be subject to the taxes imposed by
section 511 (relating to imposition of tax on unrelated
business income of charitable organizations).
‘‘(b) LIMITATIONS ON ACCOUNTS.—
‘‘(1) ACCOUNT MAY NOT BE ESTABLISHED FOR
BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu-
cation investment account may not be established for
the benefit of more than 1 individual.
‘‘(2) SPECIAL RULE WHERE MORE THAN 1 AC-
COUNT.—If, at any time during a calendar year, 2
or more education investment accounts are main-
tained for the benefit of an individual, only the ac-
count first established shall be treated as an edu-
cation investment account for purposes of this sec-
tion. This paragraph shall not apply to the extent
more than 1 account exists solely by reason of a roll-
over contribution.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EDUCATION INVESTMENT ACCOUNT.—The
term ‘education investment account’ means a trust
created or organized in the United States exclusively
for the purpose of paying the qualified higher edu-
cation expenses of the account holder, but only if the
written governing instrument creating the trust
meets the following requirements:
‘‘(A) No contribution will be accepted—
‘‘(i) unless it is in cash,
‘‘(ii) except in the case of rollover con-
tributions from another education invest-
ment account, in excess of $1,500 for any
calendar year, and
taxable year and is made not later than the time
prescribed by law for filing the return for such tax-
able year (not including extensions thereof).
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ has the meaning
given such term by section 529(e)(3), except
that such expenses shall be reduced by—
‘‘(i) the amount excluded from gross
income under section 135 by reason of
such expenses, and
‘‘(ii) the amount of the reduction de-
scribed in section 135(d)(1) (other than
subparagraph (E)).
‘‘(B) STATE TUITION PLANS.—Such term
shall include amounts paid or incurred to pur-
chase tuition credits or certificates, or to make
contributions to an account, under a qualified
State tuition program (as defined in section
529(b)).
‘‘(4) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ has the
meaning given such term by section 135(c)(3).
‘‘(5) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual for whose benefit the
education investment account is established.
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount paid or distrib-
uted out of an education investment account shall be
included in gross income of the payee or distributee
for the taxable year in the manner prescribed by sec-
tion 72. For purposes of the preceding sentence,
rules similar to the rules of section 408(d)(2) shall
apply.
‘‘(2) DISTRIBUTION
USED
TO
PAY
EDU-
CATIONAL
EXPENSES.—Paragraph (1) shall not
apply to any payment or distribution out of an edu-
cation investment account to the extent such pay-
ment or distribution is used exclusively to pay the
qualified higher education expenses of the account
holder.
‘‘(3) SPECIAL
RULE
FOR
APPLYING
SECTION
2503.—If any payment or distribution from an edu-
cation investment account is used exclusively for the
payment to an eligible educational institution of the
qualified higher education expenses of the account
holder, such payment shall be treated as a qualified
transfer for purposes of section 2503(e).
‘‘(4) ADDITIONAL TAX FOR DISTRIBUTIONS NOT
USED FOR EDUCATIONAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
this chapter for any taxable year on any tax-
payer who receives a payment or distribution
from an education investment account which is
includible in gross income under paragraph (1)
shall be increased by 10 percent of the amount
which is so includible.
‘‘(B) EXCEPTION FOR DISABILITY, DEATH,
OR SCHOLARSHIP.—Subparagraph (A) shall not
apply if the payment or distribution is—
‘‘(i) made on account of the death or
disability of the account holder, or
‘‘(ii) made on account of a scholarship
(or allowance or payment described in sec-
tion 135(d)(1) (B) or (C)) received by the
account holder to the extent the amount of
the payment or distribution does not ex-
ceed the amount of the scholarship, allow-
ance, or payment.
‘‘(C) EXCESS CONTRIBUTIONS RETURNED
BEFORE
DUE
DATE
OF
RETURN.—Subpara-
graph (A) shall not apply to the distribution to
a contributor of any contribution paid during a
taxable year to an education investment account
to the extent that such contribution, when
added to previous contributions to the account
during the taxable year, exceeds $1,500 if—
‘‘(i) such distribution is received on or
before the day prescribed by law (including
extensions of time) for filing such contribu-
tor’s return for such taxable year, and
‘‘(ii) such distribution is accompanied
by the amount of net income attributable
to such excess contribution.
Any net income described in clause (ii) shall be
included in the gross income of the contributor
for the taxable year in which such excess con-
tribution was made.
‘‘(5) ROLLOVER
CONTRIBUTIONS.—Paragraph
(1) shall not apply to any amount paid or distrib-
uted from an education investment account to the
extent that the amount received is paid into another
education investment account for the benefit of the
account holder not later than the 60th day after the
day on which the holder receives the payment or dis-
tribution. The preceding sentence shall not apply to
any payment or distribution if it applied to any prior
payment or distribution during the 12-month period
ending on the date of the payment or distribution.
‘‘(6) SPECIAL
RULES
FOR
DEATH
AND
DI-
VORCE.—Rules similar to the rules of section 220(f)
(7) and (8) shall apply.
‘‘(e) TAX TREATMENT OF ACCOUNTS.—Rules similar
to the rules of paragraphs (2) and (4) of section 408(e)
shall apply to any education investment account, and any
amount treated as distributed under such rules shall be
treated as not used to pay qualified higher education ex-
penses.
‘‘(f) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(g) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if
the assets of such account are held by a bank (as defined
in section 408(n)) or another person who demonstrates,
to the satisfaction of the Secretary, that the manner in
which he will administer the account will be consistent
with the requirements of this section, and if the custodial
account would, except for the fact that it is not a trust,
constitute an account described in subsection (b)(1). For
purposes of this title, in the case of a custodial account
treated as a trust by reason of the preceding sentence,
the custodian of such account shall be treated as the trust-
ee thereof.
‘‘(h) REPORTS.—The trustee of an education invest-
ment account shall make such reports regarding such ac-
count to the Secretary and to the account holder with re-
spect to contributions, distributions, and such other mat-
ters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals
at such time and in such manner as may be required by
those regulations.’’
(b) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 (relating to prohibited transactions) is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION INVEST-
MENT ACCOUNTS.—An individual for whose benefit
an education investment account is established and
any contributor to such account shall be exempt
from the tax imposed by this section with respect to
any transaction concerning such account (which
would otherwise be taxable under this section) if,
with respect to such transaction, the account ceases
to be an education investment account by reason of
the application of section 530 to such account.’’; and
(2) in subsection (e)(1), by striking ‘‘or’’ at the
end of subparagraph (D), by redesignating subpara-
graph (E) as subparagraph (F), and by inserting
after subparagraph (D) the following new subpara-
graph:
‘‘(E) an education investment account de-
scribed in section 530, or’’.
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION
INVESTMENT ACCOUNTS.—Section 6693 (relating to fail-
ure to provide reports on individual retirement accounts
or annuities) is amended—
(1) by striking ‘‘INDIVIDUAL RETIREMENT’’
and inserting ‘‘CERTAIN
TAX-FAVORED’’ in the
heading of such section, and
(2) in subsection (a)(2), by striking ‘‘and’’ at
the end of subparagraph (A), by striking the period
at the end of subparagraph (B) and inserting ‘‘,
and’’, and by adding at the end the following new
subparagraph:
‘‘(C) section 530(h) (relating to education
investment accounts).’’
(d) COORDINATION WITH SAVINGS BOND EXCLU-
SION.—Section 135(d)(1) is amended by striking ‘‘or’’ at
the end of subparagraph (C), by striking the period at the
end of subparagraph (D) and inserting ‘‘, or’’ , and by
adding at the end the following new subparagraph:
‘‘(E) a payment or distribution from an
education investment account (as defined in
section 530).’’
(e) CLERICAL AMENDMENTS.—
(1) The table of sections for part VIII of sub-
chapter F of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 530. Education investment accounts.’’
(2)(A) The heading for part VIII of subchapter
F of chapter 1 is amended to read as follows:
‘‘PART VIII—HIGHER EDUCATION SAVINGS
ENTITIES’’.
(B) The table of parts for subchapter F of
chapter 1 is amended by striking the item relating
to part VIII and inserting:
‘‘Part VIII. Higher education savings entities.’’
(3) The item relating to section 6693 in the
table of sections for subchapter B of chapter 68 is
amended by striking ‘‘individual retirement’’ and in-
serting ‘‘certain tax-favored’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
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