Six UK universities have begun advertising interest-free student loans under a government-backed scheme designed for students who cannot take out loans that charge interest for religious reasons.

The universities - University College London, Bristol, Leeds, City St George's, Newcastle and De Montfort - are telling prospective applicants about the Alternative Student Finance product, which could be available from the 2026-27 academic year. No official launch date has been confirmed by the Department for Education (DfE).

The scheme is based on Takaful, the Islamic principle of mutual financial assistance. Instead of paying interest on top of the amount borrowed, graduates pay an equivalent "contribution", which is ring-fenced to fund future students on the same scheme rather than going to the Treasury.

Open to all students, government says

Although the product was designed to be compatible with Islamic finance principles - Islamic law prohibits the payment and receipt of interest - the government says it is open to any eligible undergraduate. A DfE spokesman said all graduates would repay their loans in full regardless of which system they used, "including an equivalent alternative to interest".

The department's guidance, published in June 2025, says students using alternative student finance will suffer "no detriment" and experience "no advantage" compared with those on conventional student loans. The product will be certified by the Islamic Finance Supervisory Board, and the legal power to offer a loan without interest comes from section 86 of the Higher Education and Research Act 2017.

Universities are describing the product in different ways. Bristol calls it an "interest-free UK Government loan" that is "compatible with Islamic finance principles", Leeds says it could be available from 2026-27, Newcastle describes it as "non-interest bearing" and "sharia-compliant", and De Montfort says it is "certified as sharia-compliant" for students who cannot take out interest-bearing loans for religious reasons. Cambridge, by contrast, directs students to guidance from the UK Fatwa Council, which has endorsed mainstream student finance as permissible.

Criticism and cost

The scheme has drawn criticism. Reform UK's education spokesman, Suella Braverman, called it an "outrageous anti-British scheme" and said it would create a two-tier system in higher education. Critics have also pointed out that official forecasts already expect nearly half of student debt never to be fully repaid, meaning taxpayers would underwrite any shortfall while repayments under the new scheme are ring-fenced for future participants.

The DfE paid the Islamic Finance Council UK more than £365,000 of public money to help design the scheme, and has presented it as one of the first state-backed sharia-compliant student loan systems in the world.

Sources: The Telegraph, Energy Radio