The broken business model of British universities
The Labour Party barely talked about higher education in the run-up to the general election in July. In government, universities’ problems are harder to ignore. In a dour speech on September 10th Sir Keir Starmer, the prime minister, included universities among a list of public services that he said were “crumbling” and “worse than we expected”.
Rising costs, combined with a fall in the number of more lucrative foreign students, are forcing cuts: some 70 institutions are retrenching in one way or another, according to a list compiled by the University and College Union, a trade union. In May the Office for Students (OfS), a regulator, said that 40% of universities and colleges expected to be in deficit by the end of the 2023-24 financial year. In a “reasonable worst-case scenario” that could rise to 80% in three years. At least one or two universities are rumoured to be close to insolvency. On September 17th the BBC reported that Universities UK, a lobby group, had asked for more funding to fill financial holes.
At the root of universities’ difficulties lies insufficient funding for domestic undergraduates (see chart 1). The tuition fee they may charge British students was capped at £9,000 ($11,880) a year in 2012, and has scarcely risen since. Inflation has gobbled away at its value: it is now worth less than £6,500 in 2012 prices.
A crunch might have come sooner but for a sudden and sharp influx of foreign students, whose fees are not capped and who can often pay double what their English peers are charged. Their numbers began to soar five years ago, in response to a change in visa rules that permitted foreign students to remain in Britain for two years after their courses ended. This unleashed demand from students in places such as India and Nigeria (who find it much easier to pay for rich-world courses if they come with the right to stay and work once they have finished). They flocked to universities that until then had not taken many foreigners, and enrolled mostly in one-year masters courses.
But the foreigner boom is now turning into a bust. Arrivals from abroad peaked in the 2022-23 academic year, and are falling fast (see chart 2). So far this year the government has granted 17% fewer student visas than it did during the same period of 2023. One vice-chancellor thinks that the worst-affected universities could be facing falls of 30-50%. Some of the reasons, such as an economic crisis in Nigeria, lie outside anyone’s control. But government policy has also played a role. At the start of this year the Conservatives, seeking to bring down net migration, began forbidding most foreign students from bringing their spouses or children. That is having a bigger impact than most had expected.
This is not just a problem for universities that are highly reliant on foreigners. As a hedge against trouble, many institutions have this year sought to enroll more British undergraduates than they usually would. Prestigious ones have found this easiest: the number of British youngsters winning places in “high-tariff” institutions, such as those in the Russell Group collection of universities, is up by around 13% this autumn. That has left universities lower down the food chain short of new domestic entrants. (It doesn’t help that rising living costs make student life less appealing.)
The financial risks are rising as a result. “I would be surprised if, after this round of annual reports, there is not one university that has to have some form of significant intervention,” says Jonathan Simons of Public First, a think-tank. Things will get a bit clearer once term starts—when universities are able to count how many successful applicants have actually turned up—but conversations with creditors are already happening. “Some institutions are talking to banks about potential breaches of covenant on loans,” says John Rushforth, executive secretary of the Committee of University Chairs, a charity that advises university leaders. “And we know that there have been some discussions with auditors about ‘going concern’.”
Failure and fees
For Labour, two questions stand out: how to handle a university that runs out of money and how to put the sector onto firmer ground. On the first issue, the official line is that failing institutions should not expect government help. On August 15th Jacqui Smith, the minister for skills, said that “if it were necessary” the government would let a university go bust.
That line might just about hold should problems strike at institutions that are fairly small or in a city such as London, which has several dozen universities that could soak up displaced students. In many cases, however, the government would probably find the fallout from a collapse intolerable. Administrators would neither prioritise refunds for students nor make much effort to help them continue their studies elsewhere. Local bigwigs, terrified of losing one of their biggest employers, would scream for help. Spooking foreigners would only deepen universities’ malaise.
During the covid-19 pandemic the then government set up a process, the “higher education restructuring regime”, whereby universities that risked running into financial trouble could discuss their options with the government. Nick Hillman of the Higher Education Policy Institute, a think-tank, believes Labour should create something similar. “It wasn’t a perfect process, by any means, but it was a process—and what we have at the moment is nothing.” If the government is really willing to contemplate wind-downs then it ought to rig up a “special administration” regime of a sort that already exists for colleges of further education, reckons Mr Simons. That would grant administrators permission to consider the interests of students, in addition to those of big creditors.
Even if Labour sidesteps a university bankruptcy in the coming months, the party will still have to decide what to do about the sector’s overall financial footing. Since coming to power the government has confirmed that it has no plans to further tighten visa rules. But it is very unlikely to reverse the ban on foreign learners bringing relatives with them.
The problem is not just that dependants were boosting net migration figures: between 2019 and 2022 the number of dependants arriving with students rose from 16,000 to 134,000. It was also feared that the system was being gamed. Under the old regime spouses were permitted to work in Britain while their partners studied as well as for the two years after they graduated. Politicians began to worry that students from poorer countries were enrolling in British universities solely to gain these working rights.
The other obvious way to steady the ship would be to push up funding for British undergraduates. There are two ways to achieve that. The government currently doles out about $1bn annually in “teaching grants” designed to help fund high-cost courses such as medicine and dentistry. Widening and increasing these payments would please people who think Britain loads too much of the cost of higher education onto its students (public spending provides only about 25% of all funding for universities and colleges, compared with an average of 67% in the OECD club of rich countries). Higher teaching grants was one recommendation in the last big government review of university funding, in 2019.
The cheaper, and therefore much likelier, approach is to increase tuition fees. The Institute for Fiscal Studies, another think-tank, reckons that this would cost the government only about a quarter as much as expanding teaching grants (because graduates would cough up the lion’s share of the extra cash in student-loan repayments). Only a few years ago Labour was promising to abolish fees entirely; it would not relish the prospect of raising them. But policymakers have overestimated the furore this would cause, says Mr Hillman: “The funding system is not broken; what’s broken is politicians’ bravery.”
Were it to go down this path, Labour could perhaps dampen discontent by bundling a higher fee with reforms to the loan system. In opposition Bridget Phillipson, now the education secretary, said that she was interested in ways to reduce monthly repayments for newer graduates, so as to give them more “breathing space at the start of their working lives”.
She has also claimed that changes made by the Conservatives last year, which increased the amount of student debt that low-earning graduates pay back to the government while reducing lifetime costs for well-paid ones, are “desperately unfair”. The party is said to be interested in alternative repayment models that might use sliding interest rates to dramatically increase the sums high-earning graduates are asked to contribute. In theory this might generate money that the government could then spend reintroducing grants to cover living costs for poorer students, which the previous government junked in 2016.
Universities fret that Labour will end up deciding all these options are unappealing and put off decisions by setting up a meandering independent review. On September 12th Lady Smith, the skills minister, sought to reassure the House of Lords that her party would not be hanging about. Fixing university funding “will take some time to get right”, she said. “But I do not believe that it will take as long as some people fear.” If institutions start to get into real trouble, Labour may not have much choice but to act fast. ■
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