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If you have outstanding debts i.e student loans, does this impact on what Zakat you pay?
For long-term debt, such as mortgages or student loans, the non-interest or principal portion only of the forthcoming lunar year's worth of payments can be deducted for Zakat calculation purposes. However, because repayment of such debt is not required immediately and because such a deduction may even prevent someone who is relatively wealthy from paying Zakat, you may choose not to subtract any part of your long-term debts from your calculation.
I have been told I need to deduct any money I owe from my saving and then work out Zakat from what is left over. Please could you confirm if I need to deduct my student loan from my saving before I calculate the 2.5% Zakat.
Student loans should not be deducted for Zakat purposes.
Any personal debts can be deducted.
By personal loan here, we mean a loan between friends/family that is recallable at any time, meaning that let's say your friend lent you £500 and said you could pay it back in six months’ time, they could still come back at any time to demand it from you immediately. Such loans are deductible from the Zakatable assets of the debtor and are added to the Zakatable assets of the creditor before Zakat is paid. e.g. in this case you would subtract £500 and your friend would add £500 in their calculation.
Long-term debts like student loans and mortgages are different because the lender cannot demand the outstanding balance at any time they feel like it. In this case, scholars give the allowance of up to 12 months’ worth of non-interest portion of upcoming payments to be deducted from one's assets before calculating Zakat. However, this allowance should only be taken if, by not doing so, one feels that one's ability to make the repayments is impacted. e.g. let's say I have £10,000 today and my upcoming payments for my mortgage are £12,000. Either I can pay £250 of Zakat on £10,000 or subtract £12,000 and pay no Zakat at all. The question is, by paying £250 of Zakat today, am I really affecting my ability to pay £12,000 back over the next 12 months? This seems unlikely and so the allowance should only be taken if one is really in a difficult situation, e.g. lost job and no income and fearing risk of being unable to make repayments.
In the case of the student loan in particular, in the vast majority of cases, the payments are deducted at source anyway and so since one never sees that wealth, it is not worthy of deduction. The other point to note here is that when one is at university then there is no requirement to pay back any of the debt at the time and so nothing should be deducted at that stage either.