SECTION 6. QUALIFIED STATE

TUITION PROGRAMS

Under current law, a qualified state tuition program (QSTP) means a program established and maintained by a state under which a person may: (1) prepay tuition benefits on behalf of a beneficiary so that the beneficiary is entitled to a waiver or a payment of qualified higher education expenses, or (2) contribute to an account that is established for paying qualified higher education expenses of the beneficiary. The tax on earnings attributable to prepayments or contributions is deferred until the earnings are distributed from the QSTP. The beneficiary pays tax on the earnings at the time of distribution. If amounts saved through a QSTP are used to pay for college, the student or the student’s parents still may be eligible to claim either the Hope Scholarship Credit or the Lifetime Learning Credit. Q1: How have the prior rules for QSTPs

been changed by TRA ‘97? A1: (1) QSTPs may now be used to save

for room and board expenses, up to a specified level (generally the school’s posted room and board charge, or $2,500 per year for students living off-campus and not at home); (2) QSTPs may now be used to pay expenses not only at public and nonprofit institutions but also at proprietary schools (i.e., any school that is an eligible educational institution for purposes of the Hope Scholarship or

tion does not depend on whether the loan is federally guaranteed or subsidized. Q3: What costs are included in the costs

of attendance? A3: Costs of attendance include all items

that are included in costs of attendance for purposes of calculating a student’s financial need in accordance with the Higher Education Act. Thus, they include tuition, fees, room, board, books, equipment, and other necessary expenses, such as transportation. Costs of attendance include more items than are included in qualified tuition and related expenses for purposes of the Hope Scholarship and Lifetime Learning Credits. (See Sec. 1, Q&A5 and Sec. 2, Q&A10.) Q4: Is the deduction available for interest

paid on loans used to pay for graduate school? A4: Yes. Q5: Are there any limits on who may

take the student loan interest deduction? A5: Yes, there are income restrictions.

To claim the maximum deduction, a taxpayer must have modified adjusted gross income of $40,000 or less ($60,000 for married taxpayers filing jointly). The amount of the taxpayer’s deduction is gradually reduced for taxpayers with modified adjusted gross income between $40,000 and $55,000 (between $60,000 and $75,000 for married taxpayers filing jointly). For example, for 1998, the maximum deduction a single taxpayer with modified adjusted gross income of $47,500 could take would be $500. Taxpayers with modified adjusted gross income above $55,000 ($75,000 for married taxpayers filing jointly) may not claim the student loan interest deduction. The modified adjusted gross income limitations are indexed for inflation after 2002. Q6: May former students whose loans

are already in repayment deduct the interest they pay on a student loan on or after January 1, 1998? A6: Yes, but they may deduct only those

payments made during the first 60 months that interest payments are required on a loan. If interest pay

ments on a student loan were first required before January 1, 1998, the months in which those payments were required count against the 60month time limit for that loan. The 60-month period may run out at different times for different loans. Q7: May a parent claim the student loan

interest deduction if the parent borrows to pay his/her child’s costs of attending college? A7: Yes. An individual may claim the

student loan interest deduction if the individual borrows money to pay the costs of attending college for certain members of the individual’s family or household (including his/her children) and incurs the debt in a year in which the individual supplies more than half of the student’s support. Q8: If an individual has paid more than

$1,000 in interest on student loans in 1998 and is otherwise eligible to take the maximum student loan interest deduction, how large a deduction may the individual claim? A8: The individual’s student loan interest

deduction for 1998 is $1,000, provided the individual’s modified adjusted gross income falls below the point where the deduction is reduced or eliminated. Q9: Does an individual have to itemize

his/her income tax deductions to claim the student loan interest deduction? A9: No. The student loan interest deduc tion is available regardless of whether an individual elects to take the standard deduction or to itemize deductions. Instructions accompanying the 1998 tax forms (for returns required to be filed in 1999) will explain how to compute and claim the deduction. Q10: If a student is claimed as a depen dent by his/her parent in a particular taxable year, may the student take the student loan interest deduction for student loan interest that he/she pays in that year? A10: No. The student may not claim the

student loan interest deduction in any taxable year in which he/she is claimed as a dependent on another taxpayer’s Federal income tax return. However, if the student continues to pay interest on a student

November 17, 1997 16 1997–46 I.R.B.

Lifetime Learning Credits, see Sec. 1, Q&A4); (3) Accounts in QSTPs may now be transferred tax-free from the beneficiary to a broader range of family members. (Step-siblings and spouses of family members have been added.) Q2: May a student using a QSTP to pay

for college also benefit from the Hope Scholarship Credit or Lifetime Learning Credit? A2: Yes. The student or the student’s

parent may claim a Hope Scholarship Credit or Lifetime Learning Credit for qualified tuition and related expenses covered by a qualified state tuition program, provided the other eligibility requirements for the credits are met. Q3: When are the changes to the QSTP

rules made by TRA ‘97 effective? A3: Generally, the new rules go into ef fect on January 1, 1998. However, the new provision permitting QSTPs to be used to save for room and board expenses is effective back to August 20, 1996. Q4: May contributions be made to both a

qualified state tuition program and an Education IRA on behalf of the same designated beneficiary in the same taxable year? A4: No. Any amount contributed to an

Education IRA on behalf of a designated beneficiary during any taxable year in which an amount is also contributed to a qualified state tuition program on behalf of the same beneficiary will be treated as an excess contribution to the Education IRA. (See Sec. 3, Q&A6 for the treatment of excess contributions to an Education IRA.)