TORY Universities Minister David Willetts was forced to come clean yesterday about plans to give privateers who buy student debt a taxpayer-funded bung.

Fears have been raised that the government would raise interest rates to make debt easier to sell to City sharks.

Mr Willetts ruled out raising the 1 per cent cap at Parliament's business, innovation and skills committee.

But he admitted the government may give privateers the same amount of public cash that they would have received from graduates if rates went up.

The accounting trick was labelled a "synthetic hedge" in a secret report by investment bank Rothschild for the government that was exposed last year.

Left Labour MP Katy Clark pointed out that Rothschilds estimated the government could sell a fraction of debt without the incentive.

And she pushed Mr Willetts to clarify his position. She asked: "Is that the way you're thinking?"

He said: "The synthetic hedge is an attempt to construct for a future purchaser further revenues as if the base rate plus 1 per cent did not exist.

"It's a candidate - it's absolutely not decided but that's the kind of thing you could do."

Education expert Andrew McGettigan explained the "synthetic hedge" would make the sell-off politically easier for Mr Willetts.

He said: "Raising interest rates would require primary legislation. It's got electoral issues, it's far more apparent and easier to oppose.

"The synthetic hedge is obscure, does the same trick and it's a no brainer."

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