Introduction

The student debt crisis exceeds $1.4 trillion and impacts 44 million people in the US.  Approximately 70% of college seniors at nonprofit schools graduate with debt,[1] while that figure stands at 90% for students pursuing two-year degrees at for-profit schools.[2]  Unfortunately, the above statistics include thousands of Muslim students and parents given the absence of any Sharia-compliant college financing scheme.

As colleges continue to raise tuition at nearly double the rate of inflation,[3] Muslims who are concerned about avoiding ribā (interest) for themselves and their children worry about paying college tuition for multiple children, all entering college within a few years of one another, at the inflated rates in the future.  However, some states and one private college consortium offer a potential solution for avoiding such a situation through prepaid college tuition program, where one locks in and pays a fixed tuition rate today for their children’s education in the future.  One must analyze these prepaid tuition plans, along with its contractual details, to understand its Sharia compliance and whether it serves as a valid option for avoiding ribā in the future.

529 Plan

A 529 plan, also known as a qualified tuition plan, offers tax advantages to encourage saving for future college expenses.  An individual may open either a college savings plan or invest in a prepaid tuition plan.  A college savings plan allows the person to open an investment account to save for the beneficiary’s future qualified college expenses, such as tuition, mandatory fees, and room and board.

On the other hand, a prepaid tuition plan lets an individual purchase units or credits, at current prices, for tuition and mandatory fees at participating colleges and universities for the beneficiary’s use in the future.[4]  For example, if the individual purchases a $35,000 plan based on the current tuition at a college for his beneficiary to use in ten years, and if that college’s tuition increases at an average of 4% a year, the tuition at the college will rise to $51,809 by the time the beneficiary enrolls, resulting in a $16,809 tax-free saving for the account holder.[5]

Although every state offers a 529 plan, only a few states[6] offer a prepaid tuition plan and only one consortium offers a private plan.[7]

General Framework

When an individual purchases a prepaid tuition plan, he pays the current fixed tuition rate, either in-full or over installments, for a beneficiary’s future education.  The beneficiary may utilize the benefits after a minimum period and up to several, potentially exceeding thirty, years since purchase.  The account holder’s purchase converts to units or credit hours, which the beneficiary may apply toward any college within the plan.  The prepaid plans also account for valuation of the purchase to apply toward colleges outside the plan, if the beneficiary decides to enroll elsewhere.  The benefits may also transfer to another beneficiary in certain cases, such as the initial beneficiary receiving scholarships or deciding to not enroll in college, and the account holder also maintains the right to a refund.  However, the details of the refund vary between the state-sponsored and the privately-sponsored plan.[8]

In the state-sponsored plan, if the account holder cancels due to the beneficiary’s death, disability, or receipt of sufficient scholarships, then he receives the value of the mean-weighted average cost of tuition at the colleges in his plan.  If he cancels for any other reason, he receives the full refund, minus any services used and the cancellation fees.[9]  In the privately-sponsored plan, the account holder does not pay any fees, but his refunds depend on the net performance of the trust managing his investment, with a ceiling and floor of 2%.[10]

Sharia Compliance

According to the financial transaction laws of the Sharia, the prepaid tuition plan constitutes a forward service contract (ijārah mudāfah) with an upfront security deposit (hāmish jiddīyyah) between the account holder and the state representing its owned colleges or the non-profit consortium owned by and representing the participating private colleges.[11]  The forward service contract is permissible, although the security deposit must remain fully refundable, as the account holder retains its ownership.[12]  The Sharia does not stipulate a maximum time limit to a forward service contract.

Although one does not find an objection in the contract’s core (sulb al-ʿaqd), the same does not hold true for some of its conditions (shurūt), especially related to refunds.  Since the account holder owns the security deposit in the possession of the plan provider, the provider must return the full amount to the account holder, subtracting either any services utilized or any harm caused due to not fulfilling the promise to enter into the contract in the future.  In the absence of these two reasons, the provider cannot charge any predetermined amount, as found in the state-sponsored plans.

Likewise, the plan provider in the privately-sponsored plan, i.e. the consortium, may not invest the security deposit and pass on the profit or loss, even if capped, to the account holder, as the provider’s responsibility entails simply safeguarding the money.  The account holder assumes the ruling of a depositor and provider as the one responsible for safeguarding.  Hence, the provider must assume any loss resulting from the impermissible investment and may not keep any profit from it.  The account holder deserves the right to a full refund, nothing more or less.  In case he receives any additional amount above the security deposit,[13] precaution (ihṭiyāt) demands that he donates such money.[14]

Ideally, one must abstain from any contractual dealings containing objectionable clauses.  Unfortunately, most of the contracts nowadays contain such clauses, and one cannot practically avoid all such transactions.  Hence, if the core of the contract (sulb al-ʿaqd) meets the Sharia requirements, there is scope to overlook tangential clauses.[15]  However, one must strive to avoid invoking such clauses, such as by transferring benefits to another beneficiary instead of canceling the prepaid tuition contracts.

Conclusion

Given the student debt crisis shows no signs of easing, a Muslim must adopt any permissible means to safeguard himself and his children from falling into ribā and engaging in a self-defeating war with Allah Taʿālā and His Messenger (peace and blessings be upon him).[16]  The prepaid college tuition programs offered by the state and privately meet the Sharia standards for permissibility, even if they fall short of the ideal.  Hence, one may invest in such prepaid tuition programs, but he should strive to avoid invoking the refund clause.

And Allah knows best.

Mufti Abrar Mirza
Mufti Abdullah Nana
Mufti Suhail Tarmahomed
Mufti Sohail Bengali

Jumādā al-Thānī 1, 1439 – February 17, 2018

Disclaimer: This resolution comments on the Sharia ruling on prepaid tuition programs; it does not offer any financial advice related to such investments.  Additionally, as contracts can change over time and vary slightly between each state, one should verify with a Darul Iftaa the details of the contract as of the time of the investment.

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