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Student loans and sharia law

June 26, 2014

There was a short debate  at Westminster earlier this week (on 24 June) on proposals by the UK Government to introduce an alternative student finance arrangement for students concerned that conventional student  loans under the new model (“Plan 2”) introduced for England and also Wales in 2012  are not compliant with sharia law.

A Whitehall consultation recently closed, seeking comments on a self-contained system under which a pool of funds would be established, from which payments would be made to students while they study.  Students in turn would contract to repay what they had taken out, plus a further charitable contribution to the fund, to help future generations of students.  The aim would be to make the repayments identical to what students would make under the conventional loan scheme and the scheme would be open to any student, regardless of faith. The fund would be administered by the Student Loans Company, but ring-fenced from its other activities. It is argued that by replacing  interest with additional charitable contributions, the same levels of repayments can be obtained as under the conventional loan scheme without breaching sharia law principles.

David Willetts,  Minister for Higher Education told Parliament this week that this model had been approved by Islamic finance specialists (although there has been some suggestion in the press of concern that the model was not compliant). It has the support of the NUS.  It is not yet certain however that it will go ahead.

The old loan scheme, as still used in Scotland and Northern Ireland (“Plan 1”), appears not to be regarded as a  problem, as interest is pegged to RPI: it is the introduction of real-terms interest in the new scheme which has raised the issue.  However, playing down the delay which there will have to be in introducing any new scheme, which wouldn’t be available until 2016 at the soonest, David Willetts noted during the debate that many Muslim students are still taking out Plan 2 loans.

The BIS consultation refers to the UK Muslim community and the proposals do not explicitly suggest access would be limited  to English and Welsh domiciled students, although that might be regarded as implicit, given it is presented as an alternative to Plan 2 loans. Making this a UK-wide scheme would open up the interesting possibility that Scottish students (of any faith and none)  could opt for  this scheme if they preferred the higher income threshold for repayments and shorter write-off period applying in the Plan 2 scheme.  As noted elsewhere on this site, for those who do not expect to be high earners, the English and Welsh Plan 2 system is potentially cheaper, even with its higher interest rates.  It might seem odd to imagine students shopping around in this way: but it’s not entirely implausible.

Presuming however this development is directly relevant only to students domiciled in England and Wales, it remains interesting as an extension of the general debate about loans.  Indeed, the more explicit linking of contributions to the benefit of future generations has echoes  of the model of graduate contribution proposed by the Cubie Committee in Scotland. Although the graduate endowment was not put in place on Cubie’s terms –  a wholly separate endowment fund was not set up –  the legislation did include a specific provision that income from the endowment should be put towards student support.  It’s interesting to see this sort of thinking now re-surfacing from a different direction.

Indeed,  the proposals in the BIS paper, with a ring-fenced fund and a reasonably high income threshold are in these respects closer to the Cubie model than the version legislated for in Scotland in 2000 – although the sums being sought from students are of course a great deal higher than Cubie’s £3,000, even allowing for inflation.  If the SLC could absorb this model, what possibilities would open up for ringing changes on the way the resources available through the SLC are packaged and conceptualised for the devolved nations?




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