Challenged universities need more than UK’s tuition fee thaw

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Top UK universities routinely win high marks in international rankings. But many of their less famous peers are flunking important financial tests. The recent decision to increase university tuition fees in line with inflation next year will not, by itself, make much difference. 

It halts the erosion of the income from teaching domestic students. But costs are rising too. After taking account of the rise in employers’ national insurance announced in the Budget, the net increase averages a princely £45,000 per institution.

Many problems are down to overexpansion. The funding model introduced in 2012 created an incentive to maximise student recruitment without much pressure to provide value for money. There was also little reason to minimise taxpayers’ exposure to written-off student loans until the accounting rules changed in 2018. Universities sought to attract growing numbers of international students. Their share of total fee income rose 12 percentage points to 44 per cent in the six years to 2022-2023.

That helped bridge the funding gap caused by the domestic tuition fee freeze. But foreign student numbers have sharply fallen after new visa restrictions on their ability to bring in dependants were imposed in January. There is also growing competition from Canadian and Australian institutions.

The pain is unevenly distributed. Rating agency S&P Global Ratings reckons most universities’ credit quality will remain solid, though margins are being severely squeezed. At the institutions it monitors, it expects operating profits to average about 0.5 per cent of operating expenses in the next two years, down from almost 5 per cent over the past three years.

Best placed are research-intensive institutions, with famous brands that are a big draw for international students. Institutions such as Oxford, Cambridge and University College London only relied on domestic undergraduate tuition fees for about 5 per cent of their total income in 2023, according to rating agency Moody’s. 

The finances of lower-ranked universities that focus on domestic students are also reasonably stable as they will benefit from the fee rise and not suffer much from international students staying away. The most vulnerable institutions are lower-tier universities that rely on international students, especially those drawn from countries such as Nigeria and India who are particularly affected by the recent visa changes.

Struggling institutions have been cutting jobs and considering mergers and partnerships. That might not be enough to stave off disaster. The universities that staked their future on recruiting growing numbers of international students are finding that bet is rapidly turning sour.

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