All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad is His slave and Messenger.
In its eighteenth session, held on 1-5 July 2008, the European Council for Fatwa and Research resolved the following:
"It is permissible for Muslim students in Europe to benefit from students loans offered by the European countries to their citizens. They can use them in paying school/university fees and living expenses, provided these loans are without Riba which is connected to the cost-of-living index, for the following reasons:
1) The said students’ loans establish that they are free of Riba in principle.
2) The laws governing the process of collecting installments from the student take into account the situation of students and their wellbeing and their ability to repay. Students are not required to pay the installments except after obtaining a job with an average income, then the installments are taken from them in accordance with the tax system that takes into account the ratio with PCI (average income), and other matters that take into consideration the wellbeing of the student who borrows the money and not the wellbeing of the country (government) giving the loan." [End of quote]
The additional amount that is added to the loan in January of each year, which is the inflation rate of the currency, which is added in order to conform to the changes in the cost of living; this (addition) contradicts the condition for the resolution of the council that it is permissible for students to take this loan. This is because the Council's decision stipulated for the permissibility that "the loan should be without Riba which is connected to the cost-of-living index"; therefore, it is not permissible to enter the said loan.
If any student had already taken the loan, then he has to pay the original debt only (without the interests) and if he died before paying it off, and the government drops the loan, then he is free from liability. Otherwise he is still Islamically required to pay it.
However, if one was determined to pay it off before he died (but died before he could), then we hope that the following Hadeeth applies to him. The Prophet said: "Whoever takes people's money while wanting to repay, Allah would repay it for him (i.e., save him the consequence of the debt), and whoever takes people's money while wanting to spoil them, then Allah will spoil him (i.e. spoil his wealth and punish him in the Hereafter)." [Al-Bukhaari] Ibn Hajar said: "Since this is his case (truly intending to repay his debt), then there will be no consequences on him in the Hereafter [..] Allah would take care of the lender in the Hereafter (by giving him reward to please him and make him waive his right in the debt)." [End of quote]
For more benefit, please refer to Fatwa 152311.
Allah knows best.