Universities across the UK are telling students about a new government-backed student loan that does not charge interest, designed to be compatible with Islamic finance rules. The scheme, known as Alternative Student Finance, has prompted a political row before it has even launched.

The Department for Education is developing the product, and no launch date has been set. Some universities say it could be available for the 2026-27 academic year. Universities including University College London, Bristol, Leeds, City St George's, Newcastle and De Montfort have begun telling applicants about the option on their websites.

How does the interest-free student loan work?

Instead of interest, borrowers pay an equivalent contribution. That money goes into a ring-fenced fund used to support future students on the scheme, rather than going back to the Treasury. The government says graduates will repay the same amounts, on the same timetable, as those on standard student loans.

The product is based on takaful, an Islamic principle of shared mutual support, and will be certified by an Islamic Finance Supervisory Board before it is introduced. The scheme is intended for England and will be administered through the Student Loans Company. The government confirmed in June 2025 that the product does not include interest, and the Higher Education and Research Act 2017 provided the legal framework for it. The Islamic Finance Council UK was paid more than £365,000 in public money to help design it.

Why was the scheme created?

Many Muslim students say standard loans, which charge interest, conflict with their faith. A 2021 Muslim Census survey of nearly 39,000 British Muslims found that 80 per cent of students felt conflicted by regular loans. Parliamentary discussions have suggested that more than 12,000 students a year either avoid university or face extra financial difficulty because they are unwilling to take interest-bearing loans.

Why has it caused a row?

Reform UK education spokesman Suella Braverman called the scheme an "outrageous anti-British scheme" that creates a "two-tier system" in higher education. Critics argue that a separate repayment fund could create unequal treatment, and point out that taxpayers still cover loans that are never repaid. Official forecasts expect almost half of student debt across the whole system to go unpaid.

The Department for Education rejects that argument. A spokesman said it would be "completely false to assert that Alternative Student Finance arrangements would give favourable treatment to Muslim students", adding that "all graduates will be repaying their loans in full regardless of which system they use". The Centre for Media Monitoring has also complained to The Telegraph, saying the scheme's repayments will support all students enrolled in it, regardless of faith. The scheme is open to any student eligible for student finance.

Students should check the official GOV.UK student finance pages for the latest information, as the details of the scheme have not yet been finalised.

Sources: Energy Radio and Academia Mag.