Question Summary:
If a student loan is haraam, why car insurance is allowed?

Question Detail:

Assalamu alaykumPlease can you answer my 2 questions.1. Is a student loan haraam and if so, why is it whilst car insurance is allowed. I've heard that car insurance is allowed because its a law of the land, yet one is able to take other halal means eg public transport. And this will cause difficulty, but this difficulty is arguably less when compared to the struggle for one who doesn't attend uni, as this potentially affects the majority of their life. 2. I've taken out a student loan, and will receive approx £7000. My current money besides student loan is very little (below £100). Is it allowed to give sadaqah from loaned money and specifically from student loan money, because this money might be haraam? Please could the question be answered fullyJazakhAllah

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
 
1) Your analogy of student loan on car insurance is not parallel. If it was assumed that one can take out an insurance based loan to purchase a vehicle, then your analogy would have merit. There are differences between the car insurance situation and student loan.
 
Firstly, in the situation of the car insurance, the issue is not about taking an interest-bearing loan to purchase the car. It is about an external factor not related directly to the purchase of the car. It is about taking out insurance as a legal requirement. That is not so in the student loan situation wherein one takes an interest-bearing loan. The interest is directly related to the principle transaction unlike the purchasing of the car wherein the interest is not directly related to the purchase of the car.
 
Secondly, it is permissible to purchase a car. It is prohibited to take an interest-bearing loan.[1] The analogy of a prohibited act cannot be on a permissible act.
 
Thirdly, motor car insurance is a legal requirement,[2] that is not so with taking a student loan.
 
We take note of your point of greater need in taking loans to educate one self. The difference between the two is in the case of car insurance, a haram act is imposed against ones will,  and in the case of student loan, one willingly adopts haram wherein there is no imposition against ones will. If haram is imposed on something مباح (permissible), that person will be excused.
There is no reason for one to be excused for taking a student loan. We do however acknowledge the need of educate oneself. The above explanation is meant to point out the incorrect analogy.
 
If we go by that analogy, that will make many haram things permissible.   
 
2) The act of taking an interest-bearing loan is sinful. The actual borrowing money is permissible. It is not haram. You may give sadaqah from the borrowed money.[3] However, if you borrowed money for your studies, you should not exhaust that money in giving sadaqah. You have $100 in your account. It is advisable to give some sadaqah from that money if you wish to.     
 
 
And Allah Ta’āla Knows Best
Rabiul Islam
Student Darul Iftaa
Detroit, Michigan, USA
Checked and Approved by,
Mufti Ebrahim Desai.