or organized in the United States for the exclusive benefit of designated beneficiaries and with respect to which the requirements of paragraphs (2) and (5) of section 408(a) are met.".

(2) PRIVATE QUALIFIED TUITION PROGRAMS LIMITED TO BENEFIT PLANS.-Clause (ii) of section 529(b)(1)(A) is amended by inserting "in the case of a program established and maintained by a State or agency or instrumentality thereof," before "may make".

(3) ADDITIONAL TAX ON NONQUALIFIED WITHDRAWALS.-Section 529 is amended

(A) by striking paragraph (3) of subsection (b) and by redesignating paragraphs (4), (5), (6), and (7) of such subsection as paragraphs (3), (4), (5), and (6), respectively, and (B) by adding at the end of subsection (c) the following new paragraph:

"(6) ADDITIONAL TAX.-The tax imposed by section 530(d)(4) shall apply to any payment or distribution from a qualified tuition program in the same manner as such tax applies to a payment or distribution from an education individual retirement account. This paragraph shall not apply to any payment or distribution in any taxable year beginning before January 1, 2004, which is includible in gross income but used for qualified higher education expenses of the designated beneficiary.".

(4) CONFORMING AMENDMENTS.

(A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are amended by striking "qualified State tuition" each place it appears and inserting "qualified tuition".

(B) The headings for sections 72(e)(9) and 135(c)(2)(C) are amended by striking "QUALIFIED STATE TUITION" each place it appears and inserting "QUALIFIED TUITION".

(C) The headings for sections 529(b) and 530(b)(2)(B) are amended by striking "QUALIFIED STATE TUITION" each place it appears and inserting "QUALIFIED TUITION".

(D) The heading for section 529 is amended by striking "STATE".

(E) The item relating to section 529 in the table of sections for part VIII of subchapter F of chapter 1 is amended by striking "State".

(b) EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS.—

(1) IN GENERAL.-Section 529(c)(3)(B) (relating to distributions) is amended to read as follows:

"(B) DISTRIBUTIONS FOR QUALIFIED HIGHER EDUCATION EXPENSES. For purposes of this paragraph

“(i) IN-KIND DISTRIBUTIONS.-No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense.

"(ii) CASH DISTRIBUTIONS.—In the case of distributions not described in clause (i), if—

"(I) such distributions do not exceed the qualified higher education expenses (reduced by ex

penses described in clause (i)), no amount shall be includible in gross income, and

"(II) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions.

"(iii) EXCEPTION FOR INSTITUTIONAL PROGRAMS.In the case of any taxable year beginning before January 1, 2004, clauses (i) and (ii) shall not apply with respect to any distribution during such taxable year under a qualified tuition program established and maintained by 1 or more eligible educational institu

tions.

"(iv) TREATMENT AS DISTRIBUTIONS.-Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for purposes of this paragraph.

“(v) COORDINATION WITH HOPE AND LIFETIME LEARNING CREDITS.-The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced

“(1) as provided in section 25A(g)(2), and

"(II) by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A.

"(vi) COORDINATION WITH EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.-If, with respect to an individual for any taxable year

"(I) the aggregate distributions to which clauses (i) and (ii) and section 530(d)(2)(A) apply, exceed

"(II) the total amount of qualified higher education expenses otherwise taken into account under clauses (i) and (ii) (after the application of clause (v)) for such year,

the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under clauses (i) and (ii) and section 530(d)(2)(A).".

(2) CONFORMING AMENDMENTS.—

(A) Section 135(d)(2)(B) is amended by striking "the exclusion under section 530(d)(2)" and inserting "the exclusions under sections 529(c)(3)(B) and 530(d)(2)".

(B) Section 221(e)(2)(A) is amended by inserting “529," after "135,"

(c) ROLLOVER TO DIFFERENT PROGRAM FOR BENEFIT Of Same DESIGNATED BENEFICIARY.-Section 529(c)(3)(C) (relating to change in beneficiaries) is amended

(1) by striking "transferred to the credit" in clause (i) and inserting "transferred

"(I) to another qualified tuition program for the benefit of the designated beneficiary, or

"(II) to the credit",

(2) by adding at the end the following new clause:

“(iii) LIMITATION ON CERTAIN ROLLOVERS.-Clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary.", and

(3) by inserting "OR PROGRAMS" after "BENEFICIARIES” in the heading.

(d) MEMBER OF FAMILY INCLUDES FIRST COUSIN.-Section 529(e)(2) (defining member of family) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and by inserting "; and", and by adding at the end the following new subparagraph:

"(D) any first cousin of such beneficiary.”.

(e) ADJUSTMENT OF LIMITATION ON ROOM AND BOARD DISTRIBUTIONS.-Section 529(e)(3)(B)(ii) is amended to read as follows: "(ii) LIMITATION.-The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed

"(I) the allowance (applicable to the student) for room and board included in 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 date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or

"(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.".

(f) SPECIAL NEEDS SERVICES. Subparagraph (A) of section 529(e)(3) (defining qualified higher education expenses) is amended to read as follows:

(g)

amended

“(A) IN GENERAL.-The term 'qualified higher education expenses' means—

“(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

"(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.". TECHNICAL AMENDMENTS.-Section 529(c)(3)(D)

is

(1) by inserting "except to the extent provided by the Secretary," before "all distributions" in clause (ii), and

(2) by inserting "except to the extent provided by the Secretary," before "the value" in clause (iii).

(h) EFFECTIVE DATE.-The amendments made by this section shall apply to taxable years beginning after December 31, 2001.

Subtitle B-Educational Assistance

SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE.

(a) IN GENERAL.-Section 127 (relating to exclusion for educational assistance programs) is amended by striking subsection (d) and by redesignating subsection (e) as subsection (d).

(b) REPEAL OF LIMITATION ON GRADUATE EDUCATION.-The last sentence of section 127(c)(1) is amended by striking “, and such term also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree”. (c) CONFORMING AMENDMENT.-Section 51A(b)(5)(B)(iii) is amended by striking "or would be so excludable but for section 127(d)".

(d) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to expenses relating to courses beginning after December 31, 2001.

SEC. 412. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME LIMITATION ON STUDENT LOAN INTEREST DEDUCTION.

(a) ELIMINATION OF 60-MONTH LIMIT.—

(1) IN GENERAL.-Section 221 (relating to interest on education loans), as amended by section 402(b)(2)(B), is amended by striking subsection (d) and by redesignating subsections (e), (f), and (g) as subsections (d), (e), and (f), respectively.

(2) CONFORMING AMENDMENT.-Section 6050S(e) is amended by striking "section 221(e)(1)" and inserting "section 221(d)(1)".

(3) EFFECTIVE DATE.-The amendments made by this subsection shall apply with respect to any loan interest paid after December 31, 2001, in taxable years ending after such date. (b) INCREASE IN INCOME LIMITATION.

(1) IN GENERAL.-Section 221(b)(2)(B) (relating to amount of reduction) is amended by striking clauses (i) and (ii) and inserting the following:

"(i) the excess of

"(I) the taxpayer's modified adjusted gross income for such taxable year, over

“(II) $50,000 ($100,000 in the case of a joint return), bears to

“(ii) $15,000 ($30,000 in the case of a joint return).".

(2) CONFORMING AMENDMENT.-Section 221(g)(1) is amended by striking "$40,000 and $60,000 amounts" and inserting "$50,000 and $100,000 amounts".

(3) EFFECTIVE DATE.-The amendments made by this subsection shall apply to taxable years ending after December 31, 2001.

SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM AND THE F. EDWARD HEBERT ARMED FORCES HEALTH PROFESSIONS SCHOLARSHIP AND FINANCIAL ASSISTANCE PROGRAM.

(a) IN GENERAL.-Section 117(c) (relating to the exclusion from gross income amounts received as a qualified scholarship) is amended

(1) by striking "Subsections (a)" and inserting the following:

"(1) IN GENERAL.-Except as provided in paragraph (2), subsections (a)”, and

(2) by adding at the end the following new paragraph: "(2) EXCEPTIONS.-Paragraph (1) shall not apply to any amount received by an individual under

"(A) the National Health Service Corps Scholarship Program under section 338A(g)(1)(A) of the Public Health Service Act, or

"(B) the Armed Forces Health Professions Scholarship and Financial Assistance program under subchapter I of chapter 105 of title 10, United States Code.".

(b) EFFECTIVE DATE.-The amendments made by subsection (a) shall apply to amounts received in taxable years beginning after December 31, 2001.

Subtitle C-Liberalization of Tax-Exempt Financing Rules for Public School Construction

SEC. 421. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL FACILITIES.

(a) IN GENERAL.-Section 148(f)(4)(D)(vii) (relating to increase in exception for bonds financing public school capital expenditures) is amended by striking "$5,000,000" the second place it appears and inserting "$10,000,000".

(b) EFFECTIVE DATE.-The amendment made by subsection (a) shall apply to obligations issued in calendar years beginning after December 31, 2001.

SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY BONDS AS EXEMPT FACILITY BONDS.

(a) TREATMENT AS EXEMPT FACILITY BOND.-Subsection (a) of section 142 (relating to exempt facility bond) is amended by striking "or" at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting ", or", and by adding at the end the following new paragraph:

"(13) qualified public educational facilities.".

(b) QUALIFIED PUBLIC EDUCATIONAL FACILITIES.-Section 142 (relating to exempt facility bond) is amended by adding at the end the following new subsection:

"(k) QUALIFIED PUBLIC EDUCATIONAL FACILITIES.

"(1) IN GENERAL.-For purposes of subsection (a)(13), the term 'qualified public educational facility' means any school facility which is

“(A) part of a public elementary school or a public secondary school, and