Why are UK universities in financial crisis?

MPs are to investigate the financial emergency affecting UK universities amid warnings many will have to make further drastic cuts or merge just to survive.

It comes after Labour MP Helen Hayes, chair of the House of Commons Education Committee, said freezes to tuition fee levels, a decline in international students and spiralling costs have led to a "perfect storm bearing down on institutions".

How bad is the problem?

There have been warnings for years of a looming crisis in university funding. A new report by the higher education regulator, the Office for Students (OfS), warns 40% of England's universities are expected to run budget deficits this year. In the last academic year, a third of the UK's 150 or so higher education institutions only had enough funds to last for 100 days, with an increasing number facing "a material risk of closure" unless they dramatically cut costs or merge over the next few years.

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It is against this backdrop that Education Secretary Bridget Phillipson announced an increase in tuition fees in England for the first time in eight years – from £9,250 per year, to £9,535 – in order to "bring stability to university finances".

How are universities funded?

The total income of UK higher education providers in 2022/23 was about £50bn. Of this, some 52% came from tuition fees (43% of which were paid by international students); 14% came from research grants (from government bodies and charities); and 12% came from direct government funding. Other sources of income include donations and endowments.

Since higher education is devolved, the UK’s different administrations have different funding models. In Scotland, home students’ tuition fees are paid directly by the government, meaning Scottish student numbers are capped, unlike in England; all Welsh undergraduates receive a minimum maintenance grant of £1,000 to help with living costs; and in Northern Ireland, fees are capped at £4,750.

Why are universities so cash-strapped?

The current financial challenges facing UK universities are broadly because of "funding reforms implemented in 2012 and the decreasing government support since then", said LSE Blogs.

Tuition fees have been frozen at £9,250 since 2017; if they had risen in line with inflation since 2012, they would have reached nearly £15,000 by now. This has caused a sharp real-terms drop in income; the last time universities’ income was this low was when tuition fees were first introduced, in 1998.

At the same time, they have had to contend with inflation-driven rises in operational costs, staff salaries and pension payments. As a result, before the tuition fee hike was announced, they were making a loss of £2,500 on each domestic student, according to analysis by the Financial Times – so the sector has become dependent on fees from international students.

What issues does that raise?

The number of international students enrolling at UK universities has, over the past 20 years, risen sharply: in 2003, there were about 300,000 students from outside the UK on their books; by 2022/23, there were 758,855 – 26% of the student body. They can be charged much higher fees than UK students – up to £26,000 a year in tuition fees for undergraduate courses – and contributed £11.8 billion in fees in 2022/23.

However, the issue is politically contentious. Universities argue that foreign students prop them up, and that it’s good to attract talent from around the world. Critics complain that education is used as a back door to economic migration; at least a third of foreign students settle in Britain, notably those from India, China and Nigeria. Rules designed to reduce this – banning most postgraduate students from bringing family members to live with them, for instance – have meant that student visa applications dropped by 16% last year. And this has greatly affected university finances.

What effect is all this having?

For years, universities have been asked to do more with less. And with foreign students no longer fully plugging the gap, more than 70 UK universities have announced staff redundancies, course closures and other forms of restructuring. Others may be forced into mergers, or axing some degrees. Some may go bankrupt, and either have to be bailed out financially by the Government, or close down.

Among academics, morale is reportedly at an all-time low. The prospect of further job losses follows years of falling pay, heavier workloads, often precarious working conditions and pension reductions – which have led to waves of strikes. There is likely to be further industrial action as redundancies and restructurings are announced.

Won’t the fee hike help?

Not really. The Institute for Fiscal Studies calculates that the hike will raise £390 million a year for universities; but changes to employers’ national insurance announced in last Autumn's Budget will likely cost them £372 million a year, leaving a net gain of just £18m. Besides, it will only start in the 2025/26 academic year. It will, though, add to the debt loaded onto students in England. The Government has stated that "longer-term funding plans for the higher education sector will be set out in due course", but that probably means waiting until public finances are stabilised.

What will the Government do?

It could increase tuition fees further or link them to inflation. It could increase grants to universities through more taxation. It could allow in more overseas fee-paying students or exclude international students from immigration statistics, "which is in line with the practice in the rest of Europe", said LSE. Or it could do some mixture of the above. The alternative is allowing higher education – one of Britain's world-leading sectors – to get poorer and smaller. Some would argue that we have too many universities. In 2006, 24.7% of UK 18-year-olds went to university; by 2023, that figure had risen to 35.8%. David Behan, chairman of OfS, has suggested that the "golden age of higher education" is probably over, and that universities are likely to move towards far shorter courses that allow students to work and study simultaneously.

Some less illustrious universities could probably fail without serious repercussions. But many are anchor institutions in their towns and cities, often among the largest employers and contributors to the local economy. Any government, particularly a Labour one, would be keen to avoid such closures.

This means that, despite the uncertainty, it is unlikely any institution will simply be allowed to go under, said the Financial Times: "just like the banks – universities are too big to fail".