As the university funding crisis dominates the headlines, Richard Watermeyer invites three experts, Huw Morris, Kate Ogden, and Mark Corver to weigh in

Huw, Kate, and Mark are unanimous that the current financial model of universities isn’t working and is unsustainable. Yet, their commentary is about more than fixing the finances of higher education (HE) in England. It’s about fixing HE at its quasi-market core, an improved value proposition and the evolution of a different – and more progressive – business model for HE.

Huw Morris, Honorary Professor of Tertiary Education, Institute of Education, University College London, UK

If we start by comparing the income and expenditure of the 165 universities in the UK,  then between 20% and 80%  of institutions have or are forecast to have a financial deficit in the current year depending on the forecaster and the method used. This is a static measure and assumes that universities cannot do anything about these issues, such as developing alternative income streams or reducing costs by selling and leasing buildings or reducing staff numbers.

If, alternatively, we compare current funding levels with those that applied in the past, then current levels are comparable with the long-run average for the sector (but could fall below if left to continue to fall for many more years). The difference between this assessment and the pessimistic estimates of HE lobbyists is explained by their use of the highest measures of inflation.

The position is somewhat different if we compare tertiary funding with other countries. Then, there isn’t a funding crisis because the funding levels in England are higher than 36 of the 38 members of the OECD, surpassed only by the USA.

This position of relatively benign funding is brought into starker relief if we consider future and broader funding needs. Forecasts by the Institute for Fiscal Studies indicate that the current student loan finance arrangements have underestimated future costs by between £8 billion and £10 billion.  On current estimates from the House of Commons Library Research service, student loans will “peak at around £500 billion in the late-2040s”. By my estimates, all things being equal, this will be at least 20% of overall government debt.

The costs of future student loan debt which is not repaid within the loan period are covered by general taxation, and provision is supposed to be made in-year for these future costs. The problem is that the forecasts of these costs have consistently underestimated future liabilities.

The provision of funds to cover future unpaid loan debt reduces the funds available for other forms of education, especially early years provision and further education courses for low-skilled adult learners. These areas of provision are not currently covered by any statutory duty for the government to fund, despite evidence suggesting that investment in these areas is likely to produce significant benefits.

The challenge is to reduce expenditure without overly reducing quality. The key is to move away from the boarding-school model of higher education and to organise more learning around work with most students engaged in some form of part-time work. Surplus estate can be divested and unnecessary bureaucracy can be removed with beneficial consequences for staff workloads and job quality while allowing for the possibility of staff rationalisation. Through these changes it should be possible to save between £1 billion and £2 billion a year in a relatively short period. This money could then be used to support more learners or used in other areas such as early years and further education.

Kate Ogden, Senior Research Economist, Institute for Fiscal Studies, UK

The latest Higher Education Statistics Agency (HESA) data on university finances shows a sector in worsening financial health, if not one in crisis just yet. Stripping out mostly one-off pension effects, the sector as a whole posted a £1.5 billion surplus in 2022-23, worth 3.7% of its income. This was smaller than the previous year’s surplus of £2.5 billion, which was 6.1% of its income. And the proportion of providers in deficit rose from one in 10 to one in five.

Data from the Office for Students suggests this year will be more challenging, with providers expecting only a tiny surplus of 0.8% on average in 2023-24. Still, with overall sector net assets worth around 16 months of expenditure, most are well placed to withstand temporary shortfalls.

More concerning is the possibility that providers can no longer rely on international students to make up the funding shortfall for domestic students. Our recent report highlighted just how far the sector has relied on international fee income to make up for the cash freeze in domestic tuition fees in recent years.

Worryingly, student visa applications are down compared to the same time last year. Whether this trend continues will be hugely important for universities’ finances next academic year. Given the state of public services and public finances, the Chancellor is unlikely to cough up much more direct funding for universities. Raising the cap on tuition fees would be cheaper, and linking it to inflation looks sensible, but would be politically divisive. Boosting support for students’ living costs or fiddling with student loan terms would be more popular in some quarters, but would do nothing for university funding.

Most higher education institutions in the sector will probably weather a few more years of frozen fees, but it’s hard to see how the current model can be sustained indefinitely. Some painful decisions lie ahead.

Mark Corver, Co-founder and Managing Director, dataHE, UK

At the heart of the funding problem for English and Welsh universities is being left unaided on the basis that they are in a commercial market while their ability to differentiate and invest is removed by increasingly distorted price controls. The undergraduate fee cap for full-time home students in English universities, frozen at £9,250 since 2017, has barely changed from the £9,000 it was introduced at 12 years ago.

The high inflation of recent years has caused the real value of this per-student resource to decline rapidly. The original resource of £9,000 in 2012 is now below £6,000 measured in the same terms. The impact of the fall is perhaps better grasped when converted to today’s money.

The current level of £9,250 is some £4,000 short of the £13,000 (adjusted for 2024) it was in 2017, and close to the nadir of £8,800 in the mid-90s. With typical inflation from this point, that low point should be hit in a year or so and would push down to £7,500 over five years, roughly half the per-student resource of 2012. With no solution in sight yet, these values are already within financial planning timelines for universities.

While the real fees per capita will affect the quality of student experience, aggregate real fees is key to the financial viability of the university. Approximating the total income for this group by year of entry, we estimate English HE providers having £9.9 billion to support teaching the new 24-25 entry cohort. This compares unfavourably to three years previous when the sector had around £13 billion (adjusted for 2024) to cover the costs of teaching a similarly sized entry cohort. From this perspective, universities are nursing a £3 billion cut, around 30%, in their annual funding for this dominant activity, and over a period too short to allow much accommodation.

Total fee income as a share of nominal UK GDP (gross domestic product) gives a broader perspective of share of national resource. Growing intakes and the rising fees per capita drove income from English students at English providers up to 0.52% of UK GDP in 2014. It has subsequently retreated to a (probable) 0.36% for 2024. This is the lowest share against GDP since the mid-2000s, despite the intake of English students being some 100,000 higher now and signals relative investment in the activity is diminishing.

The fee cap now looks low on other measures too: earnings five years after graduation are around 40% lower for 2024 entrants to the job market compared to 2012. None of this demonstrates that fee levels are too low, but it does show that fee levels are exceptionally low on many measures. And other data suggests this level has been low enough to distort supply towards higher-fee paying student populations, which constrains supply to – and, in response, demand from – other demographics that might serve wider social, economic, and academic objectives better.

UK universities are often acknowledged as a rare national asset. The sector forms more than 10% of the top ranked 200 in the world, while simultaneously supporting a strong expansion of young participation in higher education, most notably so from poorer areas. It seems then increasingly risky to inflict such deep cuts.

To conclude

Huw, Kate, and Mark show clearly that the current financial model of universities isn’t working and is unsustainable. More money to maintain the status quo is not a long-term solution. What’s needed instead is urgent organisational overhaul and a collective willingness by universities to fundamentally alter their ways of working, which may be a far harder challenge than persuading the Treasury to sanction a fees top-up. This is key if HE in England is not to contract back to a smaller elite system.

There is also a model of HE where the profligacy endemic to it – paradoxically exacerbated by the proliferation of corporate practices intended to make universities more efficient and cost-effective – is eradicated. There is surely no better time than now to rid the sector of the deadweight of so-called accountability exercises such as the Research Excellence Framework (REF), Teaching Excellence Framework (TEF), and the Knowledge Exchange Framework (KEF) to name a few, that require huge resourcing yet make little to no difference and simultaneously, reverse investment in unwieldy and burdensome bureaucratic infrastructure.

There are better ways to ensure the longevity of the sector and affirm the real value of student fees than a quick-fix cash injection. It’s time to change the model, not the sticking plaster.

_____________________________________________________________________________________________ This post is opinion-based and does not reflect the views of the London School of Economics and Political Science or any of its constituent departments and divisions.    _____________________________________________________________________________________________