In the name of Allāh, Most Gracious, Most Merciful

ARE STUDENT LOANS IN THE U.K. HARĀM?

ARE STUDENT LOANS IN THE U.K. HARĀM?

 

This article pertains to student loans made by the Student Loans Company (SLC) in the United Kingdom. Student loans in the U.K, ever since they were introduced in the 1990s, have been problematic for the UK Muslim community and generated a lot of debate. This is because a student loan incurs interest, referred to as riba (or riba an-nasiya to be more precise) in Islāmic law, which is severely forbidden in Islām to the extent that it is a major sin which has been likened to engaging in a holy war against the Almighty and his Prophet   (Quran 278-279). Because of this and the fact that the future of an individual is at stake in terms of his or her higher education the discussion on this subject can often be heated and emotional.

The SLC was established in 1989 to provide loans and grants to students studying in the U.K. In the 1990s the maximum loan was just over £2,000 for those not living with their parents and £1,290 for those living with parents. Tuition fees were introduced in 1998 and students were required to pay up to £1,000 per year. In 2006 tuition fees were increased to £3,000  and then up to £9,000 in 2010. So the situation has changed drastically since the introduction of student loans in the 1990s. The annual tuition fees are now up to £9,250 and an annual maintenance loan of up to £10,702. So for a 3-year or 4-year University course the total debt can be around £60,000.

Initially, those who started studies before 1998, the interest paid on a student loan was in line with inflation (retail price index, RPI) and Muslim scholars debated whether this was riba forbidden in Islām or not. The overwhelming majority opinion amongst the Muslim scholars was that this interest paid in line with inflation was riba and, hence, such student loans were forbidden (harām). Fatwa on the subject can be seen here. However, some scholars such as Javed Ahmad Ghamdi sahib does not consider such interest as riba, since the interest is only added to maintain the buying power of the original loan.
The interest payable on student loans were increased in 2012 to RPI + 3% so even those who considered paying interest at RPI was not riba could no longer use that argument.

 

Some try to argue the permissibility of student loans from the SLC based on necessity (darurah). However, higher education is not an obligation in Islām and the vast majority of students do not consider other options to avoid taking an interest-bearing student loan to make it reach the level of necessity (darurah) as per Shar'iah. The argument that a higher education is necessary to get a good job and make a living is counteracted by the fact that the rizq (which includes earning) of each individual is determined even before he or she is born.

In 2016 a fatwa was issued by Shaikh Haitham al-Haddad, a well known Islāmic scholar based in the U.K., that the student loan made by the SLC in the U.K. is not really a loan in the Shari’ sense. This viewpoint is shared by some other prominent scholars but rejected by many scholars of equal stature. He states that even though the word “loan” is used it is not really a loan but more akin to an investment. The government who gives the money (loan) to a student is, in fact, investing in its own citizen, who will share the profits he or she will make from working after qualifying. Since the student loan from the SLC is not really a loan the issue of riba does not arise, thereby, making the student loan permissible. The eminent Shaikh put forward a number of arguments to try to support the position. The main points are:

  1. Financial dealings are permissible (halāl) unless there is evidence to the contrary.
  2. The lender is the government and it gives the money (loan) to its own citizens, through its own universities, so the government is investing in the future of its citizens.
  3. The student is not given possession of the “loan” it is paid directly to the University. From a Shar'iah perspective, the borrower must be given possession of the money for it to qualify as a loan.
  4. The student does not have the option of how to spend the “loan” given to him by the SLC because he does not get possession of the money.
  5. No repayment has to be made until you reach a certain salary threshold, this is the profit of the investment which is shared with the government in a pre-agreed fixed sharing ratio, as one would in an investment partnership.
  6. If you do not reach the salary threshold you do not have to make any repayments, so you may not end up paying the government anything back at all.  
  7. The repayment amount is linked to the salary and not to the wealth of the borrower (student).
  8. The debt can be written off under certain circumstances such as 30 years after the student graduates or if he is permanently disabled or dies, so it is not like a true loan.

Points 3 and 4 above are done due to necessity to prevent abuse of the loans such as giving the tuition fees to the University rather than to the student, the maintenance grant for living expenses is given to the student directly.  
Points 4, 5, 6, 7 and 8 are arguably necessary for administrative purposes to allow the system to function.

 

The SLC and the overwhelming majority of students who take the loan consider it to be an actual loan. Although, everyone will agree that the student loan given by the SLC is not a typical loan, in the sense that it does has some peculiar conditions attached to it compared to a conventional loan, such as not requiring unconditional repayment in full and the repayments are linked to salary, but whether or not it is a true loan or not from a Shar'iah perspective, or if it is actually an investment in disguise is obviously open to debate. 

 

A number of questions arise if one takes the view that the student loan is not an actual loan as per Shar'ah and that the interest paid is not riba:

Q1. If a loan for tuition fees was made by a charity, instead of the SLC, to a student, in the same manner with the same terms and conditions as the SLC would that constitute a loan or an investment?

Q2. If a loan for tuition fees was made by a rich Muslim, instead of the SLC, to a student, in the same manner with the same terms and conditions as the SLC would the extra money the lender receives above the amount loaned (the principal) constitute riba or profit?

Q3. If the student is not truly a loan according to Shar'iah, but an investment, could a rich Muslim lend money to a Muslim student in the same manner with the same terms and conditions as the SLC and expect an income-contingent repayment, e.g. 9% of salary + interest at (RPI + 3%) of money lent, for the entire working life of the borrower?

Q4. The regular repayments are salary linked (currently 9% of gross salary) but not the total amount paid. Over the last 30 years, the average RPI has been 3.3%. If the student loans interest rate is fixed on this basis at 6.3% (RPI+3%) then someone with a student loan of £50,000 who earns a fixed £35,000 salary will pay almost £100,000 over a period of 30 years but will not manage to pay off the loan. On the other hand someone with a fixed salary of £70,000 will be able to pay off the £50,000 loan in just over 10 years and the total amount repaid will be around £75,000. The person who earns less can end up paying more in the total amount paid back.

 

 

Here is a summary of the arguments for and against.

ARGUMENTS IN FAVOUR OF IT BEING A LOAN ARGUMENTS IN FAVOUR OF IT BEING AN INVESTMENT

The wording of the contract clearly states it is a loan. The Student Loans Company (SLC) no doubt considers the student loan to be an actual loan. The contract uses the terms “lender”, “borrower”, “debt”, “repayments”, “liability”, “penalty” and court action.  

In the minds of the SLC and the student, this is a loan; the SLC considers itself to be owed money and the student considers himself or herself to be in debt after receiving the student loan.

Just because the word “loan” is used in the contract does not mean it is actually a loan from a Shar'iah perspective.
 
   

Student loans are also available for studying at private institutions.

In an investment, the investor is hoping to make a profit and assesses the risks of the investment which determines the amount invested and the profit-sharing ratio. The SLC is non-profit making and makes no assessment of its so-called investment. The contract has all the bearings of a loan in this respect. Penalties can be imposed.

The student feels the burden of debt not the elation of being in a partnership with the U.K. government.

The government has sold the mortgage-styled student debts to private companies in 1998, 1999 and in 2013. So in many cases the government no longer the student loans as a result some students have struggled. In 2017 the government sold salary-linked students debts to private companies.

The government gives the money to its own citizens, through its own universities, it is "investing" the money in the future of its citizens.

The tuition fees are paid to the University out of necessity to prevent misuse of funds. Similarly, when buying a car on loan payments or getting a bank loan to buy a house, the money is not given directly to the buyer to transfer to the seller. This also happens in other transactions when you give zakāt to orphan students in a madrassah, you do not give the zakāt directly into the hands of the orphans but to the madrassah administration to use for the benefit of the orphan students.

Furthermore, the student agrees to this condition for the tuition fees in a similar way to a borrower who takes a loan to buy a car or a house. On the other hand, the maintenance loan for living expenses is paid directly to the student.

The student is not given possession of the “loan” it is paid directly to the University. From a Shar'iah perspective, the borrower must be given possession of the money for it to qualify as a loan.

Both the parties in the contract, the SLC and the student, consider it to be a debt.

The government has sold the income-contingent loans debt books to a private company, that is to say, the government has sold the debt. The first sale was in 2017. Other kinds of debt such as mortgage style debts are similarly sold in financial markets. This is evidence that student loans do create a debt.

In an interest-bearing loan the quicker you pay off the loan the less amount you pay in total. This is exactly what happens in a student loan and why many people try to pay it off as soon as possible by making voluntary payments.

A loan in Shar'iah is a debt creating contract whereas the student loan is an income-contingent financing operation.

The repayments are linked to the borrower's ability to pay which i.e. above a certain salary threshold. This is not an unusual condition in a loan contract that the consumer will pay a debt when he is in a position to do so.

The SLC is only interested in getting back what it loaned plus interest. If it was a profit-sharing venture the SLC would continue to receive its share of the profits as long as the person continues to earn a salary above the threshold.

Interest on the loan starts to accumulate from day one after receiving the loan and is applied on a daily basis, this goes against the principles of it being an investment. 

The repayment amount is linked to the salary and not to the wealth of the borrower (student). This is akin to profit-sharing and a strong argument in favour of the student loan being a type of investment.

In few early years of SLC repayments were mortgaged style repayments. 

Thereafter, the minimum repayment required became linked to the salary, so as not to impose hardship on the borrower and to make the whole system workable and enforceable.

Although the regular repayments are salary linked (performance-linked) the total amount actually paid is not. Someone who earns less can end up paying a lot more than someone who earns a lot more (see Q4 above).

Many borrowers make repayments above the required minimum because they wish to pay off their loan as soon as possible. If the student loan was truly an investment requiring only a salary based repayment there would be no need to make voluntary repayments.

Under certain circumstances, the borrower may be required to make fixed payments rather than being salary dependent. This is part of the contract.

The repayments are performance-based, i.e. based on the salary. This is evidence that it is not a typical loan.

Voluntary repayments can be made by the borrower and the loan can be paid off in full at any time. Some Muslims students when they realise that the student loan is harām try to pay it off as soon as possible.    

Repayments only start after reaching a certain salary threshold otherwise no repayments are made.

The student loan does have some peculiar conditions attached to it which are not found in a conventional loan but that does not imply that it is not a loan.

Credit card companies under the Limitations Act cannot enforce a debt which has been dormant for 6 years. Loan companies write off loans which they consider to be bad loans are unlikely to be paid.

Under certain circumstances only part of the money given as a student loan is paid back, in some circumstances, it is written off altogether such as after 30 years. This does not happen in a Shari'ah loan which must be paid back.

Other arguments which support the fact that the student loan is an actual loan rather than an investment include:

i) The amount of student loan is linked to household income which is against it being an investment.

ii) The borrower (student) is liable whether or not he/ she finishes the course or not.

iii) In the past the SLC has sent out debt collection letters similar to commercial loan companies.

iv) The student loan contract includes clauses such as penalty charges akin to a loan/ debt contract.

 

 

Are Student Loans in the U.K. Harām? : Summary

Some consider the student loans in the U.K. to be permissible based on the premise that the student loan is not really a loan according to Shar'iah. Since it is not really a loan the issue of riba does not arise. Here is a brief summary:

  1. The first argument is that the student loan is not really a loan it is more like an investment partnership between the government and the student. 

Student Loans Company (SLC) has always viewed the student loans as interest-bearing loans, as have all the students who take out these loans. The student feels the burden of debt not the elation of being in a partnership with the U.K. government.

Interest on student loans starts to accumulate from day one which goes against it being "an investment." Also, the SLC has sent out debt collection letters in the past and issued penalties, all these indicate that the contract between the SLC and student is that of lender and borrower and not a contract of partnership in an investment venture. 

The government has sold the student debts to private companies, a unilateral decision, no hint of a partnership investment.

  1. The second argument is that the student loan is not really a loan because the student does not get ownership of the money.

Tuition fees (loan) are paid directly to the University (third-part) as happens in many other conventional loan contracts such a when buying car or house with a conventional loan, nobody has ever suggested such loans are not true loans. The maintenance loan is paid directly to the student so this second argument cannot be applied to the maintenance loan.

  1. The third argument is that the student loan is not really a loan because the contract does create a debt. 

Both the parties in the contract consider that a debt has been created, in the sense the word "debt" is used in everyday language and in English law. The student who borrows the money feels he or she is in debt, the government has sold the student debts to private companies. The private companies who buy these student debts consider them to be debts, they expect to collect the debts together with the interest. If one assumes that the student loan does not create a debt then what exactly is being sold to the private companies?

  1. The fourth argument is that the student loan is not really a loan because the repayments are salary-linked (performance-based) rather than fixed repayments as happens in a conventional loan.

The minimum repayments required are salary-linked which makes the collection of the debt easier to manage through HMRC. The total amount actually paid is not linked to the salary but how quickly the debt is paid off. Someone earning a lesser salary such as £35,000 can end up paying much more in total than someone earning a much bigger salary such as £70,000 (see details in Q4 above). The total amount paid back is not just salary-linked but also time-linked like any interest-based loan.

  1. Dealing in riba is such a great sin, the only sin which has been likened to engaging in a holy war against the Almighty God and his Prophet  that it may be better to avoid doubtful matters which may involve riba.

 

 

Dr. A. Hussain (Sept. 2020)