By Pete Dougherty

AS university costs continue to climb around the world, the way governments encourage families to prepare for those expenses matters more than ever. America created the 529 college savings plan, Britain offers the flexible Junior ISA, yet Spain has no dedicated, tax-advantaged education savings account. The result is a missed opportunity for families to build long-term wealth through the power of compound growth. Now, perhaps it is time for Spain to adopt a few educational policies by keeping an eye on the US and the UK.

A college education has become a rite of passage for many students in the US, the UK and Spain, and studies continue to show that college graduates are more likely to earn higher incomes than those without a degree. That is the positive side.

However, higher education costs continue to rise rapidly in each of these countries. That is the downside.

Let’s imagine three new parents leaving the hospital with their newborns. Each one decides to save €120 a month for their child’s future.

The American parent walks into a bank and is handed a 529 savings plan piggy bank. “Put your savings here,” says the government. “If your child uses it for higher education, the investment can grow with valuable tax advantages.”

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The British parent receives a Junior ISA piggy bank. “Yours isn’t just for university,” the government explains. “Save for whatever your child may need in adulthood, and the investments can grow free of income and capital gains taxes.”

The Spanish parent asks for a piggy bank. The banker smiles and hands over…an ordinary glass jar. “You can save if you want,” he says, “but it works just like everyone else. Spain offers no tax-advantaged savings plan for education.”

Here’s what surprises many Europeans: that the tax code in the United States doesn’t simply encourage families to save for education—it created an account specifically designed for that purpose. It’s known as the 529 college savings plan. Anyone (parents, grandparents, aunts/uncles) can open a 529 account for a beneficiary, and contributions are invested in portfolios such as mutual funds, age-based options, or exchange-traded funds.

These investment earnings grow tax-free. Withdrawals are also tax-free when used for qualified education expenses. In addition, many states also offer state income tax deductions or credits for the contributions. A few creative Americans strategically leverage these short-term state tax benefits through a process called “cycling money”. The idea behind cycling money through a 529 plan is that instead of paying qualified education expenses directly out of pocket, individuals first contribute the funds to a 529 plan and then immediately withdraw them to pay for those expenses. This strategy takes advantage of state income tax benefits offered by over 30 of the 50 states, many of which do not require funds to remain in the plan for any specific period to qualify for the tax break. By making this quick detour through a 529 plan, families can reduce their state income tax liability without altering their overall education funding strategy.

In 2022, a new US federal tax law added a significant benefit to 529 plans: if certain conditions are met, unused 529 funds can be rolled over into the beneficiary’s Individual Retirement Account (IRA) without triggering taxes or penalties. This provision helps eliminate one of the biggest concerns about 529 plans: what happens if the beneficiary doesn’t use all the money for education? Under the new rule, instead of facing taxes and penalties on withdrawals for non-educational expenditures, families can typically redirect a portion of those unused funds toward the beneficiary’s retirement savings account. As one education expert pointed out, “this means a 529 plan can now go from paying tuition to paying dividends—figuratively speaking.”

For all its complexities, the American tax code occasionally gets something right. The 529 college savings plan is one of those rare occasions. It’s a pity Spain hasn’t borrowed that page from the textbook.

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