Universities must make drastic changes to avoid closure, watchdog warns

More universities are at risk of falling into debt and some need to make drastic changes to avoid closure, the higher education watchdog said on Thursday.

A report from the Office for Students (OfS) says universities are too reliant on international students and are overly optimistic about income from future student growth, in the face of decreasing student numbers.

The domestic tuition fee of £9,250 a year has been frozen since 2017 and many institutions are reporting a drop-off in overseas students who pay much higher fees.

The annual review of the higher education sector’s financial sustainability found a decline in performance in the last academic year, 2022-23.

It reported lower surplus levels, cash flow and net liquidity with a “significantly higher” number of universities expected to fall into deficit in the coming years. However, it said there was evidence of some adjusting to respond to monetary challenges.

Some institutions are too optimistic, the report suggests, saying their predicted improved outlooks are based on additional income from an anticipated growth in student numbers.

It says: “Uncertainty about the ability to recruit significant numbers of extra students means that there is significant risk that the actual financial challenges facing the sector in the short, medium and long term are greater than providers are forecasting.”

Universities are being told by the regulator to look carefully at the credibility of their forecasts and identify contingency plans.

The report highlights key risks affecting the sector, which include a continuing decline in the real-term value of income from UK undergraduates and economic pressures on operating costs.

Another concern is the recent apparent reduction in applications after years of strong growth, especially from international students, it says.

The sector has become too reliant on income from international students, with particular vulnerability where recruitment is predominantly from a single country.

Cost of living difficulties for students and staff challenge both student recruitment and the support needed by students during their time in higher education, it added.

Susan Lapworth, chief executive of the OfS, said: “Many universities continue to manage their finances well. Many have built a strong asset base to allow them to weather financial storms. But the picture across the sector is becoming increasingly challenging.

“Financial performance and strength vary significantly for different institutions and our analysis shows 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.

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“Many universities have already started this important work to secure their long-term sustainability. They are taking difficult, but necessary, decisions about the shape and size of their institution. They are working with others on mergers or centralised services.

“The numbers reported to us for the sector as a whole are just not credible. Some institutions will certainly be able to grow. But in a competitive market — and with some evidence that applicant numbers are falling — others will struggle to expand.”

She said the reasonable worst-case scenario, which assumes a significant reduction in international student numbers and no cost-cutting activity, would leave more than 80 per cent of institutions in deficit.

The Russell Group of research-intensive universities partially blamed the threat to finances on government rhetoric deterring international students.

Dr Tim Bradshaw, its chief executive, said: “It is no surprise to see the OfS identifying increased pressure on university finances. Growing funding shortfalls for domestic teaching and research means cross-subsidy from other sources — primarily international student fees — has become increasingly important to the sector’s financial health.

“Application data suggests that recent changes in government rhetoric and policy, including the ban on postgraduate 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.

“In a week where the migration advisory committee has recognised the value that international students add to the sector, the government now has a clear steer on the benefits of maintaining the graduate route visa and letting other recent policy changes embed before making further changes. We would urge ministers to end the uncertainty and confirm as soon as possible that the route will continue in its entirety.”

The University and College Union, which represents university staff, said the higher education funding model was “broken” and needed radical change.

Jo Grady, its general secretary, said: “The Tories seem intent on making the situation worse through constant attacks on migrant students and workers. The graduate visa route must now stay, the limits on graduate students’ family members coming to the UK should be reversed and the salary threshold needs to be lowered.

“An employer education levy could pay for a publicly funded higher education system instead of tuition fees. This would mean that universities would no longer have to fight to hoover up domestic students.”

Lord Johnson of Marylebone, the former universities minister, said: “Clearly there is a growing risk that the government looks detached from reality in pursuing a non-evidence-based assault on one of the UK’s few globally competitive sectors.

“As No 10 commissioned the migration advisory commission review and set its terms of reference, it should heed its very clear recommendation, which was to leave the graduate route unchanged.”