The Government has been accused of bribing private sector lenders to back its twin-track student loans scheme. Six financial institutions which are bidding for a lucrative contract to take over the Teachers Pensions Agency have heard their chances will improve if they show an interest in the Government's proposals for privatised loans, MPs claimed this week.

Stephen Byers, shadow minister for education and employment, told the standing committee considering the Student Loans Bill that there was cause for concern about incentives and subsidies offered to private lenders to persuade them to enter the student loans market.

He suggested that a Government amendment to the Bill allowing financial institutions made up of different corporate bodies to back the scheme was designed to let in organisations such as those now bidding to run the TPA.

"We are all aware that the TPA is going to be a highly profitable exercise. It may be that the companies involved might well be in discussions where it has been indicated to them that if they were to show an interest in student loans then that might well help them as far as the Government is concerned in putting in a successful tender for the TPA," Mr Byers said.

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Eric Forth, the higher education minister, did not deny the claim.

The companies bidding for the TPA include Abbey National Benefit Consultants Ltd, Capita Group plc, Colonial Mutual Group (UK Holdings) Ltd, CSL Group Ltd, Hartshead Solway Ltd and ITnet Ltd. The Government has been trying without success to convince banks and building societies that its proposed privatised loans scheme would be a profitable venture.

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Last week, Mr Forth announced that implementation of the proposals in the Bill would be delayed until after the next General Election.

Mr Byers, calling for an amendment to limit the amount of subsidy provided to private lenders backing the scheme, commented: "We have grave reservations about precious tax-payers' resources being used to bribe private sector companies to back the loans scheme."

Mr Forth described the calls for subsidy limits as " bearing no relation to reality". He added "What you are trying to do is to limit the amount of negotiating freedom the Government has."

* MPs were reminded of the problems facing the present system last week when the Public Accounts Committee condemned the Student Loans Company's handling of an administrative crisis as a "farce".

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Acting chief executive, Sir Eric Ash, told the committee that around 35,000 students did not receive loans for up to three months after forms for repeat loans were sent to their term-time addresses during the summer of 1994.

Sir Timothy Lankester, permanent secretary for the Department for Education and Employment, said that by the time the loans company officials realised what had happened "it was too late and the system had exploded".

Sir Eric said that the repeat applications process had been introduced to save around Pounds 344,000, but in the event only a notional amount was saved.

Richard Tracey, Conservative MP for Surbiton, said the loans company's inability to deal with the crisis had "almost the makings of a farce".

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