In a desperate move to kick-start the flagging UK economy the Bank of England's monetary policy committee cut interest rates to 3% last week, the lowest level for over 50 years.

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The news has delighted UK manufacturers and homeowners who have been petitioning for a sharp and sustained cut in rates for months, but the drop in rates will do nothing to help hard-pressed student finances and it may well make them poorer.

According to the National Union of Students the typical student debt is £30,000. It follows that this week’s 1.5% cut should mean savings on average of £450.00 per year. Unfortunately, because of the way in which the interest rate is calculated, those borrowing from the Student Loan Company (SLC) are likely to be considerably worse off following the move.

"The base rate cut will not affect student loans as the student interest rate is set annually by the (SLC) and will stay at the same rate all year," says Sarah Toledo FXU Welfare President at the Falmouth and Exeter’s Student Union.

The Student Loan Company bases the interest rates they charge to students on a measure of inflation known as the Retail Prices Index (RPI). The government claim that the amount students repay to the SLC will be about the same (in real terms) as the amount students borrow, claiming that "No-one makes a profit on the loan."

When prices are rising more slowly than the rate of interest charged by the high street banks the SLC arrangement works in students favour, but when interest rates are plummeting and the cost of living rising, as is happening now, students borrowing from the SLC will lose out.
"The interest rate is announced once a year (usually August) and applies from 1 September to 31 August the following year. The interest rate is linked to the rate of inflation, in line with the Retail Prices Index," says a spokesman for the student loan company.

The rate of inflation used by the SLC to determine the amount of interest charged to students is currently running at 5%. By March 2009 (the date the SLC use to set levels of interest for the following year) the figure could be higher still. As inflation rises and the base rate falls the rates charged by the high street banks are looking increasingly attractive.

"As part of the student overdraft is free base rates don’t really apply for most students, but if the free interest limit is exceeded then interest is charged at 3% above the Bank of England’s base rate," says Terri Hogan at HSBC’s central unit.

HSBC offer a £1000 interest free overdraft to first year students rising to £2000 in the fourth year which are currently charged at 6.2%. Should the company decide to pass on the full 1.5% reduction in base rate, however, the cost of borrowing falls to 4.7%.

"As yet the company (HSBC) hasn’t authorised a reduction to the student overdraft rate, but as the rate is variable this could happen in due course," says Terri Hogan at HSBC.