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 college 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 your investments can grow tax-free.”
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.”
Why the U.S. Comes Out on Top
Here’s what surprises many Europeans: the U.S. tax system doesn’t just encourage families to save for college. The ‘529 college savings plan’ is specially designed for that purpose.
It’s known as the’ ‘529 college savings plan’.
Anyone, from parents and grandparents to aunts and uncles, can open an account for a child. The savings are invested in funds that can increase in value over time.
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.
Some Americans even use a legal tax strategy known as “cycling money.” Instead of paying a college bill directly, they first deposit the money into a 529 account and then immediately withdraw it to pay the expense. In states that offer tax breaks for 529 contributions, this can reduce their state tax bill.
One of the biggest worries parents have about a 529 plan is: “What if my child doesn’t end up using all the money for college?”
To address this concern, a new U.S. federal tax law passed in 2022 introduced a major change. If certain conditions are met, families can transfer some unused 529 savings into the beneficiary’s retirement account (IRA) instead of paying taxes and penalties if the money isn’t used for education.
As one education expert put it, a 529 plan can now help pay not only for college but also for retirement.
The U.S. tax system is often complicated, but the 529 college savings plan is one of its best ideas. Spain could learn from it.
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