A Government minister has told the Student Loans Company not to use "misleading tactics" to collect debt, after it was revealed the firm sent letters to over 300,000 graduates purporting to be from a debt collection firm.

Universities and Science Minister David Willetts spoke out after the Government-backed company's behaviour was raised in the House of Lords last week.

Willetts also revealed concerns about the letter had been raised with the Government earlier this year.

He said in a ministerial statement: "It is important that the Government recover taxpayers' money, but it must do so in a way which is fair. It must not use misleading tactics to get people to do the right thing.

"Although the SLC did not break any rules or charge graduates for receiving these letters, it was clear that a public body should be holding itself to the highest standards in the treatment of its customers".

The written statement also outlines the SLC's proposals to ensure all future dealings with customers in arrears are "fair and transparent". Willetts said he would work with the company to make sure "lessons are learnt to ensure there is no repeat in future".

MoneySavingExpert.com campaigns manager, Wendy Alcock, says: "After such a long silence from the Minister it's good to see he's getting reengaged with the issues in the student finance sector.

"We're still collecting evidence for our dossier of firms using fake lawyers and we'll let the relevant regulators know about any bad practice."

What did the SLC do wrong?

Since 2005, about 309,000 graduates received letters purporting to be from a debt recovery firm called "Smith Lawson & Company". But only at foot the of the letter does it say Smith Lawson & Company is just a trading name of the SLC, with which it shares its initials (see the 300,000 graduates sent fake debt collection firm letters MSE News story).

Its behaviour came to light after payday lender Wonga was told to pay £2.6m in compensation after it threatened borrowers with fake lawyers.

The SLC maintains it will not offer compensation in the same way as Wonga has as "no charges were made for these letters" and they were only issued to people who were in significant arrears.

The firm will no longer use the Smith Lawson trading name. "The only exceptions after 27 June were two letters sent manually in error and a small number of automated follow-up e-mails," Willetts said.

Minister 'unaware' of letters

Willetts said the letters were sent to graduates who had failed to respond to several attempts to contact them by the SLC, and were used as a low-cost alternative to referring those graduates to real debt collection agencies.

But he said he was unaware of the practice until the recent media coverage, adding that it was approved in late 2004 by the company's board and by ministers at the time.

Willetts revealed that that in February, the now-defunct Office of Fair Trading contacted the Government and SLC to express its concerns about the letters.

In particular, the competition watchdog considered the letters to be misleading because they created the impression that debts had been given to a third party to collect.

The SLC agreed to change a reference to "our client" and to increase the size of the reference to the SLC in the letter, but it decided to continue to use the Smith Lawson trading name.

These changes were due to take effect early this month, but the letters stopped altogether on 27 June following the penalty on Wonga.

SLC boss offered to resign

Willetts said the SLC's chairman, Christian Brodie had apologised and offered his resignation.

But he said Brodie would stay with the company to ensure its procedures and correspondence are fair and transparent, which will need to be approved by ministers.

"We are both clear that it would be unfair for Brodie to take the blame for a practice that was nearly 10 years old, particularly as he had only been chairman since February of this year," he explained.