To amend the Internal Revenue Code of 1986 to expand deductions allowed for education-related expenses and to allow an earned tuition credit against income tax for qualified tuition and related expenses.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Deductibility and Incentives to 
Promote Learning Opportunities and Maximize Assistance (DIPLOMA) Act of 
2006''.

SEC. 2. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Elimination of Dollar Limitation for Qualified Tuition and 
Related Expenses Deduction.--Subsection (b) of section 222 of the 
Internal Revenue Code of 1986 (relating to qualified tuition and 
related expenses) is amended to read as follows:
    ``(b) Limitation Based on Adjusted Gross Income.--
            ``(1) In general.--In the case of a taxpayer whose adjusted 
        gross income for a taxable year exceeds $80,000 ($160,000 in 
        the case of a joint return), the amount of the deduction 
        allowed under subsection (a) for the taxable year shall be 
        zero.
            ``(2) Adjusted gross income.--For purposes of this 
        subsection, adjusted gross income shall be determined--
                    ``(A) without regard to this section and sections 
                199, 911, 931, and 933, and
                    ``(B) after application of sections 86, 135, 137, 
                219, 221, and 469.''.
    (b) Termination.--Subsection (e) of such section of such Code is 
amended by striking ``December 31, 2005'' and inserting ``December 31, 
2010''.

SEC. 3. INTEREST AND PRINCIPAL ON EDUCATION LOANS.

    (a) Expansion of Deduction for Interest on Education Loans to 
Include Principal Payments.--Section 221 of the Internal Revenue Code 
of 1986 (relating to interest on education loans) is amended--
            (1) in subsection (a), by striking ``interest paid'' and 
        inserting ``interest and principal paid'',
            (2) by redesignating subsections (d), (e), and (f) as 
        subsections (e), (f), and (g), respectively,
            (3) by inserting after subsection (c) the following new 
        subsection:
    ``(d) Limit on Period Deduction Allowed.--With respect to principal 
paid on any qualified education loan after the first 60 months (whether 
or not consecutive) in which principal payments are required, a 
deduction shall not be allowed under this section. For purposes of this 
paragraph, any loan and all refinancings of such loan shall be treated 
as 1 loan. Such 60 months shall be determined in the manner prescribed 
by the Secretary in the case of multiple loans which are refinanced by, 
or serviced as, a single loan and in the case of loans incurred before 
the date of the enactment of this section.'', and
            (4) in the heading, by striking ``interest'' and inserting 
        ``interest and principal''.
    (b) Clerical Amendments.--The item relating to section 221 in the 
table of sections for part VII of subchapter B of chapter 1 of such 
Code is amended to read as follows:

``Sec. 221. Interest and principal on education loans.''.

SEC. 4. EARNED TUITION CREDIT.

    (a) In General.--Subsection (b) of section 25A of the Internal 
Revenue Code of 1986 (relating to Hope and Lifetime Learning credits) 
is amended to read as follows:
    ``(b) Earned Tuition Credit.--
            ``(1) Per student credit.--In the case of any eligible 
        student for whom an election is in effect under this section 
        for any taxable year, the earned tuition credit is an amount 
        equal to the sum of--
                    ``(A) 100 percent of so much of the qualified 
                tuition and related expenses paid by the taxpayer 
                during the taxable year (for education furnished to the 
                eligible student during any academic period beginning 
                in such taxable year) as does not exceed $1,500, plus
                    ``(B) 50 percent of such expenses so paid as 
                exceeds $1,500 but does not exceed $4,000.
            ``(2) Limitations applicable to earned tuition credit.--
                    ``(A) Credit allowed only for 4 taxable years.--An 
                election to have this section apply with respect to any 
                eligible student for purposes of the earned tuition 
                credit under subsection (a)(1) may not be made for any 
                taxable year if such an election (by the taxpayer or 
                any other individual) is in effect with respect to such 
                student for any 4 prior taxable years.
                    ``(B) Credit allowed for year only if individual is 
                at least 1/2 time student for portion of year.--The 
                earned tuition credit under subsection (a)(1) shall not 
                be allowed for a taxable year with respect to the 
                qualified tuition and related expenses of an individual 
                unless such individual is an eligible student for at 
                least one academic period which begins during such 
                year.
                    ``(C) Credit allowed only for first 4 years of 
                postsecondary education.--The earned tuition credit 
                under subsection (a)(1) shall not be allowed for a 
                taxable year with respect to the qualified tuition and 
                related expenses of an eligible student if the student 
                has completed (before the beginning of such taxable 
                year) the first 4 years of postsecondary education at 
                an eligible educational institution.
                    ``(D) Denial of credit if student convicted of a 
                felony drug offense.--The earned tuition credit under 
                subsection (a)(1) shall not be allowed for qualified 
                tuition and related expenses for the enrollment or 
                attendance of a student for any academic period if such 
                student has been convicted of a Federal or State felony 
                offense consisting of the possession or distribution of 
                a controlled substance before the end of the taxable 
                year with or within which such period ends.
            ``(3) Eligible student.--For purposes of this subsection, 
        the term `eligible student' means, with respect to any academic 
        period, a student who--
                    ``(A) meets the requirements of section 484(a)(1) 
                of the Higher Education Act of 1965 (20 U.S.C. 
                1091(a)(1)), as in effect on the date of the enactment 
                of this section, and
                    ``(B) is carrying at least \1/2\ the normal full-
                time work load for the course of study the student is 
                pursuing.''.
    (b) Earned Tuition Credit Not Reduced by Federal Pell Grants and 
Supplemental Educational Opportunity Grants.--Subsection (g) of section 
25A of such Code (relating to special rules) is amended by adding at 
the end the following new paragraph:
            ``(8) Pell and seog grants.--For purposes of the earned 
        tuition credit, paragraph (2) shall not apply to amounts paid 
        for an individual as a Federal Pell Grant or a Federal 
        supplemental educational opportunity grant under subparts 1 and 
        3, respectively, of part A of title IV of the Higher Education 
        Act of 1965 (20 U.S.C. 1070a and 1070b et seq., 
        respectively).''.
    (c) Definition of Qualified Tuition and Related Expenses.--
Paragraph (1) of section 25A(f) of such Code (relating to definitions) 
is amended to read as follows:
            ``(1) Qualified tuition and related expenses.--
                    ``(A) In general.--The term `qualified tuition and 
                related expenses' means the qualified higher education 
                expenses of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any dependent of the taxpayer with 
                        respect to whom the taxpayer is allowed a 
                        deduction under section 151.
                    ``(B) Qualified higher education expenses.--The 
                term `qualified higher education expenses' has the 
                meaning given to such term by section 529(e)(3).''.
    (d) Conforming Amendments.--Section 25A of such Code is amended--
            (1) in the heading, by striking ``hope'' and inserting 
        ``earned tuition'',
            (2) in subsection (a)(1), by striking ``Hope Scholarship 
        Credit'' and inserting ``earned tuition credit'',
            (3) in subsection (c)(2)(A)--
                    (A) in the heading, by striking ``Hope 
                scholarship'' and inserting ``earned tuition credit'',
                    (B) in the text, by striking ``Hope Scholarship 
                Credit'' and inserting ``earned tuition credit'', and
            (4) in subsection (h)(1)(A)--
                    (A) by striking ``2001'' and inserting ``2006'',
                    (B) by striking ``the $1,000 amounts'' and 
                inserting ``the dollar amounts'', and
                    (C) in clause (ii), by striking ``substituting 
                `calendar year 2000''' and inserting ``substituting 
                `calendar year 2005'''.

SEC. 5. EARNED TUITION AND LIFETIME LEARNING CREDITS TO BE REFUNDABLE.

    (a) Credit to Be Refundable.--Section 25A of the Internal Revenue 
Code of 1986, as amended by this Act, is hereby moved to subpart C of 
part IV of subchapter A of chapter 1 of such Code (relating to 
refundable credits) and inserted after section 35.
    (b) Technical Amendments.--
            (1) Section 36 of such Code is redesignated as section 37.
            (2) Section 25A of such Code (as moved by subsection (a)) 
        is redesignated as section 36.
            (3) Paragraph (1) of section 36(a) of such Code (as 
        redesignated by paragraph (2)) is amended by striking ``this 
        chapter'' and inserting ``this subtitle''.
            (4) Subparagraph (B) of section 72(t)(7) of such Code is 
        amended by striking ``section 25A(g)(2)'' and inserting 
        ``section 36(g)(2)''.
            (5) Subparagraph (A) of section 135(d)(2) of such Code is 
        amended by striking ``section 25A'' and inserting ``section 
        36''.
            (6) Section 221(d) of such Code is amended--
                    (A) by striking ``section 25A(g)(2)'' in paragraph 
                (2)(B) and inserting ``section 36(g)(2)'',
                    (B) by striking ``section 25A(f)(2)'' in the matter 
                following paragraph (2)(B) and inserting ``section 
                36(f)(2)'', and
                    (C) by striking ``section 25A(b)(3)'' in paragraph 
                (3) and inserting ``section 36(b)(3)''.
            (7) Section 222 of such Code is amended--
                    (A) by striking ``section 25A'' in subparagraph (A) 
                of subsection (c)(2) and inserting ``section 36'',
                    (B) by striking ``section 25A(f)'' in subsection 
                (d)(1) and inserting ``section 36(f)'', and
                    (C) by striking ``section 25A(g)(2)'' in subsection 
                (d)(1) and inserting ``section 36(g)(2)''.
            (8) Section 529 of such Code is amended--
                    (A) by striking ``section 25A(g)(2)'' in subclause 
                (I) of subsection (c)(3)(B)(v) and inserting ``section 
                36(g)(2)'',
                    (B) by striking ``section 25A'' in subclause (II) 
                of subsection (c)(3)(B)(v) and inserting ``section 
                36'', and
                    (C) by striking ``section 25A(b)(3)'' in clause (i) 
                of subsection (e)(3)(B) and inserting ``section 
                36(b)(3)''.
            (9) Section 530 of such Code is amended--
                    (A) by striking ``section 25A(g)(2)'' in subclause 
                (I) of subsection (d)(2)(C)(i) and inserting ``section 
                36(g)(2)'',
                    (B) by striking ``section 25A'' in subclause (II) 
                of subsection (d)(2)(C)(i) and inserting ``section 
                36'', and
                    (C) by striking ``section 25A(g)(2)'' in clause 
                (iii) of subsection (d)(4)(B) and inserting ``section 
                36(g)(2)''.
            (10) Subsection (e) of section 6050S of such Code is 
        amended by striking ``section 25A'' and inserting ``section 
        36''.
            (11) Subparagraph (J) of section 6213(g)(2) of such Code is 
        amended by striking ``section 25A(g)(1)'' and inserting 
        ``section 36(g)(1)''.
            (12) Paragraph (2) of section 1324(b) of title 31, United 
        States Code, is amended by inserting before the period ``or 
        from section 36 of such Code''.
            (13) Section 1400O of such Code is amended--
                    (A) by striking paragraph (1) and redesignating 
                paragraphs (2) and (3) as paragraphs (1) and (2), 
                respectively,
                    (B) by striking ``section 25A(f)(2)'' and inserting 
                ``section 36(f)(2)'',
                    (C) by striking ``section 25A(b)(1)'' in paragraph 
                (1) (as redesignated by subparagraph (A)) and inserting 
                ``section 36(b)(1)'', and
                    (D) by striking ``section 25A(c)(1)'' in paragraph 
                (2) (as redesignated by subparagraph (A)) and inserting 
                ``section 36(c)(1)''.
            (14) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 of the Internal Revenue Code of 1986 
        is amended by striking the item relating to section 36 and 
        inserting the following:

``Sec. 36. Earned tuition and Lifetime Learning credits.''.
            (15) The table of sections for subpart A of such part IV is 
        amended by striking the item relating to section 25A.

SEC. 6. EFFECTIVE DATE.

    The amendments made by this Act shall apply to taxable years 
beginning after December 31, 2006.

Summary: Deductibility and Incentives to Promote Learning Opportunities and Maximize Assistance (DIPLOMA) Act of 2006 - Amends the Internal Revenue Code to: (1) allow an unlimited tax deduction for qualified tuition and related expenses for taxpayers whose adjusted gross incomes do not exceed $80,000 ($160,000 for joint returns); (2) extend such deduction through 2010; (3) allow a tax deduction for principal amounts paid on education loans for the first 60 months of such loans; (4) replace the Hope Scholarship tax credit with an earned tuition tax credit for the first $1,500 of qualified tuition and related expenses (50% of expenses over $1,500 up to $4,000) for four years of postsecondary education; and (5) make the tax credit for earned tuition and lifetime learning expenses refundable.