Q: Can student loans be taken off as a liability for zakāh purposes?
Is a Student Loan added to ones zakāh liability section as a whole in every zakāh year until it is paid off unlike most deferred payment loans such as mortgages, where only the coming 12 months instalments will be added in the liability section. For example, if someone has taken a £10,000 student loan the £10,000 or whatever is the remaining sum will be added into his zakāh liability section unlike mortgages where he will only put the £1000 he is going to pay off that year in his liability section.
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A: A Student Loan will not be added to ones zakāh liability section as a whole in every zakat year.
To explain further, the rationale explained by the fuqahāʾ for the deduction of debt from one’s zakātable assets is that to settle one’s debt and so protect oneself from punitive measures is a basic necessity and whilst such assets are engaged by one’s basic necessity one cannot be said to possess wealth. The debtor’s ownership of his assets is also defective to the extent of the debt as the creditor can recover his debt from such assets without recourse to a judicial degree or the debtor’s agreement.
Under the current Student Loan system tuition fee loans and maintenance loans are recovered through a repayment mechanism of the UK tax system known as Income Contingent Repayment (ICR). The repayment period is based on income and amount borrowed and the amount to be paid back depends on the principal amount borrowed plus interest charged at the rate of inflation. Borrowers repay 9% of their income over £15,000 towards the loan which enters repayment status in the April after borrowers finish their course of study. A repayment is taken in any weekly or monthly period in which the gross salary exceeds the current applicable threshold (£288 per week, £1250 per month or £15,000 equivalent). This continues until the loan is either entirely repaid or until the remaining balance is written off under the rules of the scheme. There is no maximum monthly repayment, so that a borrower with an arbitrarily high income may repay an entire balance in a single instalment.[1]
Thus, in light of the above, if a Muslim graduate who, for example, has an outstanding balance of £10,000 in student loans takes up employment for a salary of £15,000 or less then no amount of the outstanding loan will be added to his liabilities section for zakāh purposes. This is because there is no demand yet of him to start repaying the loan and so repayment of the loan or any portion thereof does not constitute a basic necessity in his case. If the salary is more than £15,000 then only 9% of the amount above £15,000 payable until the next zakāh anniversary can be added to his liabilities section when calculating zakāh as payment of this amount will safeguard him from punitive measures. The remainder of the outstanding loan will not be added to his liabilities section as this does not constitute basic necessity.
Whilst a condition of deferred repayment is neither valid nor enforceable in a loan contract, as the deduction of debt from one’s zakātable assets is to protect oneself from punitive measures and as the English legal system affords such protection for the portion that is beyond 9%, the remainder will not be deductible.[2]
[1] See: http://www.slc.co.uk/about%20student%20finance/products%20and%20services/income_contingent_repayment.html
[2]For a detailed breakdown, please see The Categorisation of Debt for Zakah Purposes research paper on the Al Qalam website. For a ruling on UK student loans see, please see Student Loans research paper on the Al Qalam website