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.

Both Jacques and Olney said they believe Massachusetts's measure is part of a trend towards making college more accessible.

"We're starting to look at college like high school, not as a privilege but as a right," Olney said.

The provision also affects parents who take out loans to pay for their children's college tuition.

State Representative. Brian Knuuttila (D-Worcester and Middlesex), who sponsored the measure in the state House of Representatives, said the deduction is important for families who have more than two children and take out loans.

"There's a concern that people with more than two children will have to choose," Knuuttila said.

Though it eventually garnered widespread support, the measure initially faced opposition in the House.

The idea of a full tax deduction had been proposed in the state legislature three times before but met objections to its $14 to $16 million cost, Jacques said.

She said others also objected that "anything we do to subsidize education will just encourage institutions to raise the price tag."

Originally, the program was to offer an additional deduction on state income tax to make up for the interest that was not deductible from federal income taxes.

However, recent changes in federal policy on student loan interest more than halved the Massachusetts program's cost and made a change in state policy easier to sell.

By 2001 the federal government will have more than doubled the maximum deduction for student loan interest.

Through 1998, only $1,000 was deductible from federal income tax. This year, the maximum deduction is $1,500 and by 2001 it will be $2,500, about the amount of interest on a $30,000 loan that charges 8 percent interest. The deductions only apply during the first five years of repaying the loan.

The measure started in the Senate, where it was passed as part of the budget package.

When House and Senate leaders met to reconcile their separate budgets, the interest deduction plan was worked into the final legislative budget without any changes.

The state estimates that the tax deduction will cost the Massachusetts government about $6 million per year.