Go back

Analysis: Higher education finances

Image: MarioGuti, via Getty Images

Harriet Swain looks at the latest finance reports from Hesa and the OfS

One reason why universities have been frantically warning about potential financial collapse should the government scrap the graduate visa is that it’s true.

Figures released by the Higher Education Statistics Agency yesterday on the finances of higher education providers showed that a significant number are now in deficit—South Bank, Wolverhampton, Middlesex, Huddersfield, Surrey and Durham among them.

Also yesterday, the Office for Students published its annual review on the financial sustainability of the sector, which found that a higher number of providers is expected to fall into deficit in future, largely because of the risk that they will not be able to recruit the number of home and international students they were anticipating. 

It highlights four other key risks affecting the sector: decline in the value of income from undergraduates, combined with inflation on operating costs, overreliance on fee income from international students, the cost of maintaining estates and investing to reduce carbon emissions, and cost of living pressures affecting both student recruitment and the support needed for students.

Financial performance was weaker in 2022-23 than the previous year, and around 40 per cent of providers expect to be in deficit in 2023-24, although they predict an improvement from 2026.

But the OfS warns that if their projected growth in student numbers fails to materialise, nearly two-thirds of institutions would be in deficit by 2026-27. It has modelled a “reasonable worst-case scenario”, which assumes a significant reduction in international student numbers and no cost-cutting, and finds that it would leave more than 80 per cent of institutions in deficit and three-quarters facing low liquidity.

Worst-case scenario

Philippa Pickford, director of regulation at the OfS, told a press briefing yesterday that this worst-case scenario had become more likely since recent information emerged in January about falls in applications.

She said that while providers had been over-optimistic in their projections to start with, this had made them look even more unlikely.

According to the OfS report, the latest information from the sector suggests recruitment of international students in the 2023-24 cycle could be 40 per cent or more below the same point in the previous year, which could carry on into the following year.

Meanwhile, providers have forecast a large uplift in the average tuition fee received from international students. “Given the increasing volatility in the international market, and the sensitivity in some particular countries to price and other economic factors, there is uncertainty about whether this uplift is achievable,” it says.

Commenting on the report, Susan Lapworth, chief executive of the OfS, said that “an increasing number will need to make significant changes to their funding model in the near future to avoid facing a material risk of closure”.

“Today’s report is a signal to all institutions to re-test their assumptions about increases in UK and international students,” she said. “The numbers reported to us for the sector as a whole are just not credible.”

Reliance on international students

This is all very different from the noises the regulator was making last year, when it described finances as “generally in good shape”, with income and expenditure surplus significantly better than the previous year—a year when the sector was still recovering from the pandemic.

It did, however, have concerns even then about universities’ overreliance on international students, writing to 23 of them with high levels of recruitment from China on the same day it published its report “to ensure they have contingency plans” in case there was a sudden drop in this income stream.

We wondered at the time whether the OfS knew something we didn’t, speculating about possible geo-political developments. In fact, the main threat turns out to have come from the UK government and its plans to cut down on migration.

The Migration Advisory Committee report, published on Tuesday, said that further restrictions on the graduate visa route would mean: “Universities across the nations of the UK will experience further substantial financial difficulty leading to job losses, course closures and a reduction in research, and in the extreme it is not inconceivable that some institutions would fail.” It added that any policy change would need to explain “how the financial consequences for the sector would be addressed”.

Should ministers decide to ignore this and get rid of the route anyway—something that many in the sector fear could happen—they may want to argue that universities were warned.

Taking responsibility

Certainly the OfS report puts a lot of emphasis on universities’ responsibility for dealing with financial challenges—whether accusing them of unrealistic projections, insisting they take early action to deal with difficult finances and urging them to get in touch quickly if they fear they could be in financial in trouble.

In an insight briefing accompanying the report, it says it has worked with institutions whose governing bodies responded to financial challenges late and—concerningly—some whose leaders did not have a detailed understanding of which of their activities made a surplus and which a loss. It does, though, allow that “many universities continue to manage their finances well”.

At the same time, it points out that efforts by universities to meet costs by cutting courses could limit student choice in some subject areas and regions. Not that it has the power to do anything about this, it insists.

“The OfS has an important role in monitoring and reporting on financial sustainability, and intervening to protect the interests of students, as far as is possible, if a provider is at risk of closure,” the report states. “But we do not have the powers or remit to intervene to preserve provision or providers in support of sustaining the system as a whole.”

If this is a dig at the government, universities are only too happy to join in.

Vivienne Stern, chief executive of Universities UK, said: “As the OFS has recognised, universities are taking action on the ground to improve efficiencies, but these decisions are being taken without clear government oversight of the overall impact. One university closing a languages or humanities course might not seem to matter. Lots of universities doing this together leaves the country with significant knowledge and skills gaps. This could have unintended and harmful consequences for students, regional growth and the UK economy. Universities can, and already are, doing a lot to steady the ship—but we need government to help and not make things worse.”

Tim Bradshaw, chief executive of the Russell Group, said: “Application data suggests that recent changes in government rhetoric and policy, including the ban on postgraduate taught students bringing dependants, are having a negative impact on international student numbers. Any further restrictions would significantly destabilise the sector and ultimately result in less spending in local communities, fewer opportunities for domestic students and less UK research.”

Questions to answer

But the regulator has questions to answer too. Many were raised last September in a highly critical report by the House of Lords’ Industry and Regulators Committee, which called on the OfS to talk to universities more regularly about their financial situation and “ensure it is aware of the systemic challenges facing the sector”. 

It will face further questions next week at a Lords debate on the report, which takes place on Tuesday.

This year’s more downbeat OfS review of institutions’ financial sustainability may be a response to the Lords’ criticisms. Few would be unaware after reading it that systemic challenges exist, even if little help is offered to address them. Or it could just be that when universities warned that finances were tight they were right.

All in all, it has not been a good week for a government looking for an easy response when the Office for National Statistics publishes the latest net migration figures next week. First, the MAC was unable to provide evidence that international students were abusing the system, which could have allowed ministers to say they were tackling migration by cracking down on graduate visas. Now the OfS presents data suggesting that if they did cut down on visas, some universities could well go under, and they would be responsible not only for thousands of unhappy students but the resulting impact on local communities and international reputation.

It will be interesting to see how the government responds.

This is an excerpt from today’s 8am Playbook email. To find out if your institution subscribes and sign up for a personal copy, please fill in this form and add 8am Playbook as the subject. You can unsubscribe at any time.