The new Massachusetts state budget contains a new tax cut for college students and their parents.

The budget signed this month by Gov. A. Paul Cellucci allows students and parents to deduct a percentage of the interest on undergraduate student loans from their state income tax. The cut exists for the entire length of the debt as long as the debtor lives in the Commonwealth.

For years, the state has copied the Federal government's model. The tax deduction was capped at $1,000 in cumulative savings over the first five years of repayment.

In 2001, when the change takes effect, a student leaving college with $30,000 in loans at 8 percent interest--the rate for Harvard's student loan program--would owe $2,400 in interest the first year and would save $142 on state income taxes. The interest and savings would both decrease as the principal is paid off.

Generally, students don't have to pay interest on their loans while they're in school because most loan programs defer payments until after graduation.

Offering a full deduction on student loans will keep more college-educated in the state after they graduate, said the sponsor of the budget provision, state senator Cheryl A. Jacques (D-Norfolk, Bristol and Middlesex).

"[It will be] a magnificent recruiting tool," she said.

Harvard student Eric S. Olney '98, who, as an undergraduate testified before the Senate Ways and Means committee in support of the deduction, said he agrees it will influence students to stay in Massachusetts.