Is it permissible to take out a student loan?
Dealing with interest is haram
Dealing with interest (riba) is haram. Some might not consider this haram, but it is completely prohibited, because Allah Almighty stated in the Quran, in Surat al Baqarah:
Allah has made trading lawful and forbidden usury (2:275)
The prohibition of taking interest is very clear not only from the Quran but also from the Prophet’s Farewell Sermon (peace be on him) so there is no doubt about the prohibition of interest. To access and deal with interest is haram.
Is the Student Loan permissible?
The BBSI published an in depth analysis of the Student Loans in February 2024. It conducted a survey of scholars and found divergent opinions among them as to whether student loans are permissible or not.
The terminology of the student ‘loan’
Those who found it impermissible did so based on the confusing use of language in particular the words “loan” and “interest” in the contract. As riba based loans are impermissible in Islam, some scholars deemed it impermissible based on the terminology.
Those who concluded that the contract is permissible did so based on the actual terms of the contract between the student and the student loan company. Firstly, the contract itself does not follow the pattern of a typical bank loan. In fact the wording of the contract is contradictory. As stated in the BBSI report:
In the example of an interest-bearing loan:
A says to B: “I give you a loan of £100 at 10% interest per year.”
Both the words and the substance point to the fact that B has an obligation to pay back the £100 along with another £10 of interest in a year’s time. In this case, there is no conflict between the words and substance.
B owes A the £100 as a debt, so the additional £10 is ribā, which is not permissible.
But what if we have wording where there is a contradiction?
For example, suppose A says to B: “I give you a loan of £100 at 10% interest but you have no obligation to ever pay anything back to me.”
Why the “loan” is not a typical loan:
Though the contract refers to the “loan”, unlike a conventional interest based loan, it is written off if the student does not earn a certain amount in the future. There is no obligation (iltizām) to repay the capital amount of a “loan” as a debt.
The intention behind the student finance and the loan is contingent on future earnings not the amount borrowed
The House of Commons Treasury Committee report of 2018 shows that the intention of the student finance was not to create a debt obligation. It was considered an investment in people with an obligation to pay it back contingent on the income earned by the student in the future, not by the amount they borrowed. The guide to the loan states:
“How much you repay depends on your income, not what you borrow.”
“You’ll repay 9% of your income over the repayment threshold, … If your income changes, either rising or falling, your repayment amounts will automatically change to reflect this.”
The loan is cancelled if it is not paid back in certain circumstances
“There are circumstances where your student loan may be cancelled and you’ll never have to pay it back, such as if you die before you pay the loan off or if you become disabled and permanently unfit for work.”
“Your loan will also be cancelled after a certain period of time if you’ve not already paid it off in full. The length of time depends on the rules at the time you took out your loan.”
Thus the amount a graduate “repays” depends on their income, not what they “borrow”. This breaks the link between the “repayment” and the “loan” and the “interest”.
The loan behaves as a tax
The graduate’s only obligation (iltizām) is to pay 9% of any income above a threshold if earned. If the graduate does not have any income, he would not be liable to pay anything.
The loan does take into account personal wealth, only income
The reason why the graduate does not have an income has no bearing on financial liability. Nor does his personal wealth, for instance, he may be very wealthy but if he is not earning, he would not have to pay anything.
Any wealth the graduate owned before the contract does not count as income. Therefore the repayment is less like a debt, and more like a tax. This is why the terminology of “debt” and “interest” is misleading. If there is no debt, riba cannot arise in the contract.
The amount repaid is less than the loan if the earnings are low
Most graduates who earn between ‘low’ and ‘average’ salaries are expected to pay less than the original amount of their student “loan” over the 30 years.
High earners pay back more
Only graduates with between ‘above average’ and ‘very high’ salaries are expected to pay more than the original amount of their student “loan”. Meanwhile, the higher “interest” rate would mean that ‘high’, and ‘very high’ earners would also complete the full 30 years like the lower earners and pay more in total in a manner that is consistent with a progressive graduate income tax
Terminating the loan early
The contract can be ended by early repayment of the outstanding “loan” and all accrued and outstanding “interest” amounts to the Student Loans Company.
Summary
In conclusion, summarising the position of scholars who say that the Student Loan is permissible, the BBSI report says :
Riba arises where there is: (a) a debt and an obligation (iltizām) to repay that debt, and (b) an obligation (iltizām) to pay an additional amount on top of the debt. Here, neither of the two above conditions are fulfilled. Firstly, the analysis above showed that there is no debt (dayn) liability in the student “loan” contract, neither in relation to the “loan” amount nor the “interest”. Secondly, even if there was a debt in relation to the loan amount, a voluntary payment of “interest” on top of the loan would not be ribawī because of the lack of obligation (iltizām), which is required for a payment to be ribawī. The Prophet Muhammad (peace be upon him) once borrowed money and when he returned it, he made a voluntary payment of an additional amount on top of the loan.
Finally, according to the Islamic law principle of “presumption of permissibility” meaning that transactions are presumed to be permissible unless they explicitly violate Sharia law. Some of the scholars who have analysed the student “loan” contract have observed that it is more similar to a Muḍāraba contract than a loan. However, it is important to remember that this discussion of “what the contract is” has no relevance to whether the contract is permissible or not. Permissibility is solely determined by whether or not the contract contains any prohibited element.
Education is a necessity
The BBSI further shows the need for Muslims to become better educated in order to improve the situation for Muslims across the UK:
By many socio-economic measures, British Muslims come from some of the most disadvantaged ethnic minority communities. For example, over 60% of British-Pakistani and Bangladeshi households are in poverty, compared to 20% of White households – and have the highest proportion of school leavers without any qualifications (Modood, 2006). A 2009 report by the Department of Communities and Local Government found that “Somali-born migrants have the lowest employment rate of all immigrants in the UK. Levels of education within the community are also low, with 50% having no qualifications and only 3% having higher education qualifications.” Whilst education has historically been seen as the route to climb the social ladder, the consideration in pursuing a degree requires much further thought since the trebling of tuition fees. From a purely financial perspective, having a degree makes sense. According to the latest official statistics, graduates in 2019 earned a median salary of £34,000, while non-graduates earned only £24,000.2
Creating halal alternatives to student loans
Given the acute need for the Muslim community to become more educated, the language of the current student loans is proving a barrier to many who are not accessing further education because they do not want to deal with riba.
While some scholars argue that the student “loan” contract doesn’t violate Islamic law, the use of terms like “loan,” “debt,” and “interest” in student finance is objectionable to Muslims and confusing for students and a barrier to uptake. This leads to many opting out, causing financial and educational exclusion, particularly affecting Muslim youth in deprived areas and hindering their professional advancement.
This exclusion represents a missed opportunity for societal contribution, especially considering the significant Muslim population in England and Wales. To address this issue and promote financial inclusion, it’s proposed that the UK Government provide an “alternative finance” version of the student “loan” contract, replacing objectionable terms with neutral ones, aligning with the government’s goal of ensuring equal opportunities for all citizens.
Based on and reprinted from the BBSI report of Feb 2024. For the full report, view the link:
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