The exact cut is 0.8% to take the student loan interest rate to 3% for income-contingent loans.
"Low-interest loans"
Normally, the student loan interest rate is not directly tied to the Bank of England base rate. Instead, it is set at the Retail Price Index for the year to March, applied annually from the following September. Therefore changes in the Bank of England base rate do not usually directly impact on the student loan interest rate.
However, the income-contingent student loans that have been available to new students who started in September 1998 or later are classed as "low interest loans" under the Consumer Credit Act 1974. This excludes them from a number of requirements around credit agreements and so on that would apply to more expensive credit.
Never before
But to qualify as low interest loans, the interest rate cannot be higher than one per cent above the highest base rate of one of a number of nominated banks - including the Bank of England, and a number of major clearing banks such as Barclays, HBOS, HSBC, the Royal Bank of Scotland and Lloyds TSB. In the history of the income-contingent loans, there has never been an instance where the highest base rate has been more than 1% higher so this rule has never had to be enforced.
However, the current student loan interest rate is 3.8 per cent, whilst because of the recent reduction in the Bank of England base rates, the highest base rate of the nominated banks is now 2 per cent. As the rates of the other banks fall the student loan interest rate has to drop accordingly. If the rate keeps dropping, so would the student loan interest rate.
Some points to note:
• this applies across the UK;
• the reduced rate applies from 5 December
• this only applies to income-contingent loans as the "mortgage-style" student loans taken out by students funded under the pre-1998 mandatory grants system are regulated by the Consumer Credit Act and so their interest rate remains unchanged.
The Retail Price Index figure for the year to March 2009 will be used to set the new rate applicable from September 2009, so the rate could change again at that stage.