this section shall be reduced (but not below zero) by 
the amount which bears the same ratio to the 
amount which would be so allowed as—
‘‘(A) the excess of—
‘‘(i) the taxpayer’s modified adjusted 
gross income for such taxable year, over 
‘‘(ii) $75,000 ($150,000 in the case of 
a joint return), bears to 
‘‘(B) $15,000 ($30,000 in the case of a 
joint return). 
‘‘(2) MODIFIED
ADJUSTED
GROSS
INCOME.—
For purposes of this subsection, the term ‘modified 
adjusted gross income’ means adjusted gross income 
determined without regard to sections 911, 931, and 
933. 
‘‘(3) INFLATION ADJUSTMENTS.— 
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 2003, the $75,000 
and $150,000 amounts in paragraph (1)(A)(ii) 
shall each 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, determined by substituting ‘calendar 
year 2002’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof. 
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple 
of $5,000, such amount shall be rounded to the 
next lowest multiple of $5,000.’’. 
(d) TECHNICAL AMENDMENTS.—
(1) Section 25C of such Code, as so redesig-
nated, is amended by striking subsection (f). 
(2) Subsection (c) of section 25C of such Code, 
as so redesignated, is amended by striking ‘‘DEDUC-
TION’’ in the heading and inserting ‘‘CREDIT’’ and 
by striking ‘‘deduction’’ the first place it appears in 
the text and inserting ‘‘credit’’. 
(3) Paragraphs (1) and (2) of section 25C(e) of 
such Code, as so redesignated, are each amended by 
striking ‘‘deduction’’ the first place it appears in 
each such paragraph and inserting ‘‘credit’’. 
(4) Section 62(a) of such Code is amended by 
striking paragraph (17). 
(5) 
Sections 
86(b)(2)(A), 
135(c)(4)(A), 
137(b)(3)(A), 219(g)(3)(A)(ii), and 222(b)(2)(C)(ii) 
of such Code are each amended by striking ‘‘221,’’.
(6) Subparagraph (F) of section 163(h)(2) of 
such Code is amended to read as follows: 
‘‘(F) any interest taken into account under 
section 25C (relating to interest on educational 
loans).’’. 
(7) Section 469(i)(3)(F)(iii) of such Code is 
amended by striking ‘‘, 222,’’. 
(8) Section 6050S(e) is amended by striking 
‘‘section 
221(d)(1)’’ 
and 
inserting 
‘‘section 
25C(d)(1)’’. 
(9) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by 
striking the item relating to section 221. 
(10) The table of sections for subpart A of part 
IV of subchapter A of chapter 1 of such Code is 
amended by inserting after the item relating to sec-
tion 25B the following new item:
‘‘Sec. 25C. Interest on Education Loans.’’
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 3. NO INCOME TAX BY REASON OF LOAN FORGIVE-
NESS. 
Subsection (f) of section 108 of the Internal Revenue 
Code of 1986 is amended by adding at the end the fol-
lowing new paragraph:
‘‘(4) LOAN FORGIVENESS FOR TEACHERS AND 
OTHER PUBLIC SERVANTS.—In the case of an indi-
vidual, gross income does not include any amount 
which (but for this paragraph) would be includible in 
gross income by reason of the discharge (in whole or 
in part) of any loan if—
‘‘(A) such discharge was pursuant to sec-
tion 428J, 428K, 460, or 460A of the Higher 
Education Act of 1965 (20 U.S.C. 1078–10); or 
‘‘(B) such loan is an applicable loan (as 
defined in section 6103(l)(13)(C)), the repay-
ment amounts on such loan are based in whole 
or in part on the taxpayer’s income, and such 
discharge is the result of the expiration of the 
period during which the taxpayer is obligated to 
repay such loan.’’
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