A "secretive" and influential working group has advised the Government to charge students a real rate of interest on loans.

The group, whose members include representatives from the Bank of England, the Treasury and the Department for Education and Employment, has told ministers that such a move may be necessary if plans to privatise the student loan system are to succeed.

The recommendations of the Student Loans Working Group were revealed this week by Stephen Byers, Labour's employment and training spokesman, as the Student Loans Bill entered its committee stage in the House of Commons.

Mr Byers claimed that the group met in secret and had presented two options for loans privatisation: the scheme currently under consideration where banks may be subsidised to offer loans on the favourable terms of the existing system; or one in which they would directly charge students a real rate of interest. The latter model was most likely to prove attractive to the banks, offering an immediate and profitable return on investment, the group said.

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Banks would receive subsidies under the Government's proposed system, but would have to apply for them and there would be delays in payment. The banks would also have more control over a scheme under which they were allowed to charge real interest rates directly.

Such an option would also save the Government hundreds of millions of pounds in subsidies, bank insiders have estimated. It would save the public purse close to Pounds 1 billion, compared with the scheme now in committee which is expected to reduce public expenditure by Pounds 550 million over the next three years.

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Mr Byers claimed that the Government could easily push through secondary legislation to switch to the real interest rate option. He said: "If the minster knows the only way the private sector will become interested is if it can charge a real rate of interest, what is there to stop him adopting the second option which has already been put to him by the Student Loans Working Group? There is nothing on the face of the Bill that would stop the Government introducing such an option by order."

Mr Forth said: "There are and always will be a wide range of options available to the Government."