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Subsidized vs unsubsidized student loans

Fatwaa ID: 1592

Question:
السلام عليكم ورحمة الله و بركاته
My college is offering subsidized and unsubsidized loans for tuition. Obviously the unsubsidized loans would be forbidden to take as interest needs to be paid. But for subsidized, the student wouldn’t need to pay interest as the department of education pays it instead. Would it be permissible to take the subsidized loan? Would the ruling be different if a person’s financial situation is extremely strenuous?

Clarification: When applying for financial aid, the government offer grants and loans. There’s two types of loans: subsidized and unsubsidized. Subsidized means the student receiving the loan won’t have to pay the interest on the loan. There is still interest but the government is paying it under certain conditions.
https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized

Answer:
In the Name of Allaah, the Most Gracious, the Most Merciful.
As-salaamu ‘alaykum wa-rahmatullaahi wa-barakaatuh.

We take note of the details of your query. We pray that Allaah Ta’aala grants you beneficial knowledge. Your zeal to ensure Shari’ah compliance in your dealings is commendable.

In principle, interest bearing loans are not permissible. This includes interest bearing student loans. The prohibition of this is generally extended to people of all financial conditions.

The usubsidized student loans in question are not permissible as the debtor will be paying interest on it.

As for the subsidized student loans, there are two issues: interest and loan fee. We understand that the government pays the interest. While this would not generally make a difference in the prohibition, the government is the creditor in the enquired situation. Thus, the government is paying itself the interest. This is not riba in reality. As far as the loan fee is concerned, we understand that this amount is deducted before the creditor receives it. In reality, the debtor receives a loan of a lesser amount than stated and he pays only the received amount back. Accordingly, the subsidized student loan in question is permissible.

And Allaah Ta’aala knows best.
Mufti Muajul I. Chowdhury
Darul Iftaa New York
https://askthemufti.us/

01/20/1445 AH – 08/07/2023 CE | AMG3-4034

وصل اللهم وسلم وبارك على سيدنا محمد وعلى ءاله وصحبه أجمعين

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