Shabana Mahmood spoke after it was revealed that a report commissioned by the government included proposals to increase interest rates on student loans for 3.6 million borrowers in England who took out loans over the past 15 years.

The report, by Rothschild investment bank and examining how the coalition could sell student loans issued since 1998, was obtained by the False Economy website under the Freedom of Information Act, according to a story in The Guardian.

Increasing the amount that students repay into the loans system would make the loans more attractive to prospective private buyers.

In the report, the authors apparently suggest a script the government could use if it wanted to persuade graduates to accept the worsening of their conditions: ¡°We all live in difficult times. You have a deal which is so much better than your younger siblings (they will incur up to ?9,000 tuition fees and up to RPI [inflation] + 3 per cent interest rates).¡±

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Rothschild found the current cap on interest rates for the older loans ¨C either RPI or banks¡¯ base rate plus 1 per cent, whichever is lower ¨C is a deterrent to potential investors. The options it proposed, according to the newspaper, include removing that cap, which at present keeps repayment rates at 1.5 per cent. Lifting it would mean applying an interest rate of 3.6 per cent, in line with RPI of 3.6 per cent in March 2012.

In a statement, the Department for Business Innovation and Skills pointed out that the government ¡°has not made any changes to the pre-2012 loans interest rate terms¡­Work on the feasibility of selling the pre-2012 student loan book is ongoing.¡±

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But Ms Mahmood said the Rothschild proposals to raise interest rates on existing loans ¡°to pay for [the government¡¯s] privatisation of the loan book is outrageous. It would represent a complete betrayal of the 3.6 million affected students who thought they were taking out loans on completely different terms.¡±

She added: ¡°The government must now urgently clarify their plans regarding the sale of the student loan book, and reassure graduates that their repayments will not be raised simply to pay for their costly financial smoke and mirrors.¡±

Liam Burns, the president of the National Union of Students, said: ¡°Despite pushing them to establish in law that conditions on student loans could not be altered retrospectively the government refused and instead gave weak assurances that they had no plans to do so. Now we see their own advisors are suggesting that very move.

¡°By raising tuition fees the government shifted much of the cost of education on to students, and these proposals would hit recent graduates. When are those who benefited from the boom years going to take their share of the burden like [universities and science minister] David Willetts said they should before he was in government?¡±

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john.morgan@tsleducation.com