Islamic FinancePersonal Finance

Is a Student Loan Haram? Pay Back Slowly or ASAP?

People want to pay off their student loan quickly for a bunch of reasons:

  1. Commercially its better as you pay less interest
  2. Emotionally, you feel like you’re engaged in haram and want to get out of it as soon as possible
  3. You believe that Islamically you need to get out of it as soon as possible as the student loan is haram

Point (1) is true, and point (2) is primarily an emotional argument that only has any basis if (3) is true. In this article we explore whether (3) is true.

In order to do that we need to decide two things:

  1. Is a student loan haram?
  2. Is there any Islamic justification for paying it back ASAP?

Let’s get into it! (Plus a link to an exclusive “How to Purify Your Wealth” Guide at the end)

Is a student loan haram?

There are a few arguments made by people who argue a student loan is not haram:

  1. Student loans charge interest rates that track inflation.
  2. Student loans are a necessity
  3. A student loan is not really a loan in the shari’ sense

(1) used to be true but no longer is as the student loan company in England & Wales now charges above-inflation interest rates.

(2) is potentially a good argument, but only if it really is a necessity. And by that I mean you have properly tried to avoid student loans by taking the following 6 steps (as outlined in a recent video we did):

  • Consider do you need to go to university? A university degree isn’t the only route to a successful career. Really interrogate why you want to go to university. Check out this article for more on this line of reasoning. Additionally, if you’re going to a lower-ranked university, your job prospects will be lower, so factor that into your calculation. You could work for three years, or you could end up with a big debt after three years and work at a job that pays marginally more than you would have otherwise secured.
  • Take a gap year and work. This is genuinely going to really strengthen your CV and give you life skills.
  • Minimize costs whilst at university. Many students see university as a time to have a bit of fun and spend a bit more than they could or should. I know, I’ve been there myself. But if you’re otherwise going to take out a student loan, taqwa dictates that you don’t eat out every night and rent the best room in halls. Taqwa dictates that you cycle everywhere and take advantage of the 16-25 railcard. You should consider living at home if you can too.
  • Work whilst at university. This is great for quite quickly building up a good amount of money. Particularly summer internships that pay well, for example in the City.
  • Get a scholarship. As a student facing a student loan, it is really not acceptable that you haven’t spent the time even looking for a bursary or grant. Yes you may not get it, but so many Muslim students take out a loan and say “its a necessity”, and they’ve not even tried to find a bursary. Check out the lists here and here.
  • Gap years during university. This is something that people don’t often give the due thought it deserves. A year working in industry, say, after your second year, is an amazing way of securing a job for after university, gaining real-life work experience, and earning some money. I know people who took more than one gap year during university. Ultimately it didn’t harm them one bit.

So that leaves argument (3). Our respectful view is that this is not a good argument.

There are a few factors given for why a student loan is not a traditional loan in the fiqhi sense:

  1. You don’t have to pay until you hit a certain threshold.
  2. You have to pay a fixed amount of your salary as opposed to working the payment amounts out from a basis of paying back the full amount over a term.
  3. The debt expires after 30 years from the month you graduate.
  4. You never actually take possession over the loan. It is paid directly to the university.

There are compelling argument for why this could be viewed as an intergenerational grant mechanism subsidised by the government. Some prominent scholars take this position. For example, Shaykh Haitham gives his view here (see also this written summary of the position).

However in our view, a student loan is a loan. There are enough qualities of a loan here to make it such:

  1. The paperwork all refers to it as a loan. Everyone thinks of it as a loan. It is called a loan.
  2. Interest rate is charged, and above inflation level
  3. The amount you owe piles up and compounds over the years
  4. You could end up paying up to £150,000 for a £60,000 debt.

The wider implications of saying a student loan is not a loan are also very worrying. You open up the doors to a whole bunch of clever structuring in the City, and soon every “loan” is not really a loan.

As a lawyer, if you tell me that not taking possession over an interest-bearing loan is a work-around to the haram activity of consuming an interest-bearing loan, my imagination will start racing and I’ll give you a bunch of interesting structures that you can use to work around interest – but in reality  still avail of an interest-bearing loan.

We respectfully disagree with analogizing between a student loan and a mudarabah contract (see simple explanation here) as well. While it might seem prima facie intuitive that the Student Loan Company are entering into a partnership with you and hoping you’ll succeed, and if you do, they’ll take a 9% portion of your profits for 30 years, there are important differences. Firstly, the total amount you pay is not fixed only to your salary. The total amount you pay is fixed to the compounding interest-bearing loan that is still owed. Secondly, you can pay in lump-sum and reduce the overall loan you will ultimately pay. Thirdly, the Student Loan Company don’t see it this way. For them this is a loan.

So our view (and that of a few scholars we have discussed this point with) is that student loans are haram, but, if you have mitigated as much as you can, and you really need to go to university and it will be genuinely worthwhile for you, a student loan may be seen as a necessity and availed of. Here is a good scholarly video on the topic too.

Is there any Islamic justification for paying it back ASAP?

The Qur’an states: O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers. (2:278)

So if you’re actually earning the interest in a transaction, you should of course stop taking the interest ASAP once you realise it is haram. However, if you’re giving it, you can’t decide that, as the contract you entered doesn’t give you that optionality. So you have the choice of either paying the interest in the instalments set out in the contract, or you can accelerate the payments as much as you can to get out of the haram arrangement.

The question is – is the point of doing the haram the point you took out the loan, or is there an ongoing haram that is going on throughout the duration you are paying the interest back?

The argument for seeing the haram as a “snapshot” action is that the actual act of you agreeing to the loan agreement was the thing that bound you to all other actions. It is that which is haram, and so everything else is neither here nor there, and there is no concept of “continuing haram”.

However, further to discussion with scholars, ultimately we think it is recommended to be pay back your student loan ASAP (without putting yourself in excessive hardship) for two reasons:

  1. Abu Hurairah reports that Rasulullah (sallalahu ‘alayhi wa sallam) said: “When a person fornicates, his Iman leaves him (and hovers above his head) like a shadow, his Iman returns to him when he stops this act’.”(Sunan Tirmidhi, Hadith: 2625 and Mustadrak Hakim, vol. 1 pg.22).
    This hadith shows that, for some sins, the Sharia deems them so bad that the sin increases the longer the duration of the sin. You wouldn’t want that duration of being without iman to go on for any length of time.
    And taking interest is such a sin. Interestingly this following hadith links interest to the awfulness of adultery: From Abu Hurayrah: The Prophet, said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.” (Ibn Majah)
    So we would suggest that, to get out of the cycle of having to pay a haram payment every month, one pays off the student loan in bigger chunks so as to minimise the number of haram payments one has to make and the length of time that such a loan hangs over one’s head.
  2. There is also a spiritual element here. One cannot possibly feel more connected with Allah and his religion while in a brothel than if one were in one’s home. Similarly, ongoing sin (or at least interaction with a continuing aspect of a sin you entered long ago) could well hold one back from a deeper connection with Allah (swt).
    Eman is something that wears out: Abdullah ibn Amr reported: The Messenger of Allah, peace and blessings be upon him, said, “Verily, the faith of one of you will wear out within him, just as a shirt becomes worn out, so ask Allah to renew faith in your hearts.” (Mustadrak). So eman is not a logical/mechanical thing. It is a spiritual/emotional/psychological thing. That’s why the following hadith makes sense:
    Abu Hurayrah narrated that the Prophet said: “Iman has more than 70 branches. The most excellent among these branches is the saying of “Laa ilaaha ill Allah” (there is no God but Allah), and the smallest branch is to remove an obstacle from the wayside. And “Haya” (modesty) is an important branch of Iman.” (Muslim).

Conclusion

We think that taking out a student loan is in most cases impermissible (especially where you haven’t even considered properly all the other options out there to avoid or mitigate a student loan).

For commercial reasons we think it may be a sensible idea to pay your student loan back as quickly as you can easily do so, especially if you are a higher earner, as you will eventually end up paying it off, but with a lot of interest if you leave it late.

But more importantly, Islamically, the state of being in an interest-bearing loan transaction is one that should be avoided. It is spiritually damaging to one for as long as one is in that transaction. However, this doesn’t mean that you have to put the repayment of your student loan above all else. What it means is you should make its repayment a priority, but also be pragmatic about living life in a way that’s not overly difficult for you.

And as promised, here is the link to our How to Purify Your Wealth Guide.

As ever, we welcome debate and comment and look forward to hearing your thoughts and experiences on this sensitive but important subject.

14 Comments
, ,

Keep Reading

14 Comments. Leave new

  • Asslamualikum
    Is there any other way to pay university fee? And can you suggest any business with investment like £5000-£10000.
    Jazakallah khair

    Reply
  • What if your intention is to never earn over the salary threshold required for payments, such that in 30 years your loan is written off and you haven’t paid a single penny in interest?

    Reply
    • Ha – yes I did think about this. I think that if that is your intention, then probably fine…but then that would be such a waste of your 3-year degree (the whole point of which is to increase your earning potential!).

      Reply
  • Very interesting article and lots of thought provoking points made. Regarding point 3 and how it appears like a normal loan, if the wording was changed to a ‘graduate tax’ (which in the commercial sense I believe the current proposition is closer to), and the fact that one could potentially pay back less than they borrowed, would your view potentially change as arguments could then be made that this is not a traditional loan. Given that it expires on your death and at no time can the borrower claim to other assets, you could repay less than borrowed and you are effectively made to repay through a taxation on earnings, this would surely not compare to a generic loan one would deem impermissible?

    Again, keep up the good work with the blogs/articles.

    Reply
    • Good point Idris.

      I accept it is not your traditional straight-up loan. But in the round our view is that it is best to model it as a loan. It is true you can take a “payment holiday” if certain pay criteria are not met. But actually, there are some loans that have that concept built in too.

      What I am worried about is people starting to engineer loan-like products that are basically loans, but argue that because it doesn’t have x, y, z quality it isn’t actually a loan. That would be a slippery slope.

      Reply
  • My mistake, that should have said ‘at no time can the lender claim to other assets’

    Reply
    • Thanks for clarification – again, this is a quality shared by many mainstream loans too (e.g. types of unsecured loans). But again, wider point is taken, any my response is set out below.

      Reply
  • Unfortunately I disagree.
    – The 4 points you made to call student loan a loan are the same points you can make to call an islamic mortgage a mortgage.
    – A degree is necessary for some careers such as healthcare/medicine. I think we would be restricting muslims if they weren’t able to go to university.
    – I can’t imagine an 18 year old taking a gap year before starting uni, starting their first job and earning 27k after tax within that year and paying for 3 years of tuition with that money (not including living/spending costs). Also some degrees are 4/5 years. Even if you were to take multiple gap years during the study period, there are a finite number of years within which you are allowed to complete the degree. Also, I don’t think EVERY young muslim in Britain is capable of saving while working and constantly alternating between working and studying for years. Not everyone has the perseverance to work towards such a long-term goal.
    – I can see why taking the maintenance loan or any amount that is more than necessary (outside of tuition/living/food costs) would be haraam, but I do feel muslims will be put at a severe disadvantage if we say that taking a student loan is completely haraam.

    Personally, I do have a degree for which I took a student loan. But now with the job that I have, I am constantly lending to people that don’t have a degree. If I didn’t go to university because I couldn’t afford it, I would not be in a position to help the people around me, and they would be going to banks and would be stuck in debt/interest cycles which is clearly haraam – more haraam that a student loan which is only disputed.

    I don’t mean offence. I just wanted to give my opinion. Also, how did you pay for your degree? Was it at a time when the tuition fees weren’t £9k a year?

    Reply
    • Absolutely no offence taken – really valuable and useful commentary.

      My view is that student loans should be avoided/minimised as much as possible (given one’s circumstances), and then if reasonably necessary, one can take them. So completely agree that a blanket ban on student loans is not realistic or feasible.

      I disagree on the analogy between a student loan and an Islamic mortgage. I think there are material differences between a conventional and islamic mortgage from contractual, regulatory and economic perspectives.

      I was lucky enough to get a bursary when I went – and I did go in the final year when fees were lower. So accept it is harder for people now.

      Reply
  • There is a calculator on moneysavingexpert (https://www.moneysavingexpert.com/students/student-finance-calculator) which based on your expected earnings based on growth etc. over the course of the 30 years after you graduate (which is currently the write-off point I believe) tells you how much you are expected to earn.

    I have tried to run this analysis with various funds considering even decent paid jobs such as engineering and it seems to be that most people will not pay the full amount they are due to pay back, however still more than what they borrowed. If you consider any excess amount that you are paying to the government haram (interest) and not mudaraba gains, then would it not be better to take a higher loan?

    So for example if you do a degree that you want to study which will not necessarily land you in a very high paying job such as working in a major finance or business consulting firm etc, then you would be better off borrowing £60,000 instead of £40,000 as you will ultimately pay e.g.: £55,000 regardless? So instead of paying £15,000 “interest” you actually ended up paying less interest and during your uni days you were able to rent a nicer flat because you applied for the highest allowed maintenance loan.

    Also, for people who are self-employed or working abroad etc. this would lead to an interesting conundrum. You either declare your true income in which case you pay more (more “interest”) or you can lie to the government and under-report your income in which case you avoided haram interest but you are lying? I appreciate this is a bit of facetious reasoning but I am sure some people will use this argument to justify under-reporting? Do we really want fatawa to be used for tax evasion?

    Also really agree with your argument about paying it off quickly being better for the soul (as well as better financially), in places like the US where student loans are never written off, if your student loan interest rate is 6% and you are going to pay it anyways, then it would make sense to pay it off quickly as you could consider that you are essentially guaranteed a return on investment of 6% as in the future you will have more money.

    I do agree that there are a lot of other options for a good career such as a degree apprenticeship etc. or even just starting work and therefore not having to go to university, but I just think that considering student loans as just another interest-bearing loan actually encourages people to either not explore opportunities or maybe even go to a low-ranking university (lower income means less paid back meaning less (or no interest) in the future.

    I think your point about a slippery slope if student loans are considered non-interest bearing loans from a fiqhi perspective has some weight but ultimately any new financial instrument should be gauged on its own rather than based on student loans. If student loans are halal, there could be another instrument that is very similar but haram due to other reasons. Surely the implications of a fatwa should be considered when it is applied too?

    Reply
  • Assalamo alaikum

    I was very much of this opinion until my own children got to university stage; it would have prevented them from going. In honesty I’m still conflicted about it but sadly do not have £9k+ per year per child to avoid this.
    There was a governmental petition some years ago regarding a shariah compliant student loan, do you know if anything is in the pipeline?

    JazekAllah khair

    Reply
  • Assalaamu’alaykum
    Ibrahim: good points well made. Ultimately we must consult a trusted scholar for the answer but the above facts and considerations are important. I appreciate the clarity of the argument and to effort to call a spade a spade when its a spade.
    Umm Salam: Please see: https://www.halalstudentloans.co.uk/ – but it hasn’t got anywhere yet.
    Shame that we are still grappling with this issue. AlhamduliLah
    I know families that have considered moving to Scotland to reduce fees. Living at home and bursaries help. Work a year or two before uni might help (especially if it skills you to do part time work while in uni) – hard but the norm in many areas in the world (eg USA).
    Gone are the days of studying any old degree at any old uni for fun – if you are from a low income family.
    May Allah make it easy for our youth to hold fast

    Reply
  • Assalamo Alykum
    A year ago as my daughter was about to join the uni I have done a huge research in whether a student loan is permissible. Looked at through all angles. Spoke to quite few scholars. Listened to quite few bayans especially on this subject and came to the conclusion that interest is haram and is best to avoid at all cost.
    However I am bit puzzled with your reply to RF especially where you have mentioned that the loan should be avoided/minimised as much as possible and then if necessary ‘one can take them’
    Can you please elaborate this under the light of quran and hadith.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Image of life insurance text
Life Insurance: is it haram or halal?
Islamic mortgage
How to get a cheap Islamic mortgage/halal mortgage and save money
Every British Muslim needs a will. IFG Wills is an affordable quality option entirely online.

Follow IFG

YouTube
Get exclusive tips, resources and courses delivered straight to your inbox from IFG.
  • This field is for validation purposes and should be left unchanged.
Menu