Fewer international students mean higher fees for British undergrads and fewer UK institutions.

A university in Britain has never gone bankrupt, which is quite a record for a sector with more than 900 years of history. The day may not be too far away, if the sounds of distress emanating from the halls of academia are anything to go by. The head of the largest higher-education union has called for an emergency rescue package to stave off “catastrophe.” The crunch should surprise nobody. This was a crisis foretold.

A succession of reports has warned of the precarious funding structure underpinning UK universities. Tuition fees for domestic students have been held at £9,250 ($11,925) since 2017, and have been increased by only £250 in the past 12 years. They are now worth less than £6,000 in 2012 prices. Without the rich endowments that backstop US universities or other significant sources of income, British institutions have turned to international students, who pay far higher fees. Their dependence on this lucrative revenue stream has increased as the numbers surged. Once growth turned to shrinkage, a reckoning was inevitable.


Fewer Students Are Coming

Visa numbers were continuing to trend down as of June. The peak season for applications is July to September

About 40% of higher-education providers, or 108 out of 269, expect to be in deficit in the current university financial year ending July 31, according to a May financial-sustainability report by the Office for Students, which regulates the sector. That’s before they feel the full effect of the decline in international recruitment. The word “challenging” appears 13 times in the study.

The report modeled a series of gloomier scenarios than the forecasts provided by universities, which it described as too optimistic. In the bleakest, overseas entrants were seen dropping 61% by 2026-27 compared with the year ending Wednesday. That would reduce the sector’s annual net income by a cool £9.7 billion and push 226 institutions, or 84% of the total, into deficit. Even in the mildest scenario, which posited no growth in overall student numbers through 2026-27, net income was seen falling £3.4 billion with 176 providers sinking into deficit.

How likely is such a contraction? It’s not beyond the bounds of possibility. A 60% drop would take the overseas student intake only back to the roughly 200,000-a-year numbers they were running at between 2012 and 2018. A 45% reduction in the coming academic year “appears to be realistic” based on recent recruitment data, the report said. They may yet settle at a higher level. The latest Home Office statistics for student visa applications show a 17% decline in the six months through June from a year earlier. The peak season for applications is from July to September, so a fuller assessment will have to wait until later in the year.

Even if a late pickup in overseas demand provides a stay of execution, it doesn’t change the overall picture of a funding model that has reached its sell-by date. Growth in higher-paying international students has papered over the shortfall in revenue at the cost of social strains, with domestic applicants increasingly feeling squeezed out of the most competitive courses at the most desirable universities. The system will soon have to absorb a much larger cohort of UK students: A demographic bulge means there will be 200,000 more 18-year-olds in 2030 than in 2020.

The Labour government that took office this month has rejected the appeal for a bailout from Jo Grady, general secretary of the University and College Union, which represents 120,000 sector employees. A university financial crisis is the last thing Labour needs, with so many other claims on the public purse. Dozens of institutions are already planning or implementing staff and course cuts to reduce costs — Lincoln, Huddersfield, Goldsmiths in London and Kent among them, according to reports in British media. The majority of the sector “is in trouble,” Vivienne Stern, chief executive officer of Universities UK, which represents 142 institutions, told BBC radio.

The failure of a major institution would test the government’s resolve to have the sector sort out its own problems. Higher education is a significant economic contributor and source of competitive advantage for Britain, with a worldwide reputation for quality that fuels export earnings and burnishes the country’s prestige. The sector supported 768,000 full-time jobs and generated economic output of more than £130 billion in the academic year ending in 2022, according to a study by London Economics.

Fundamental change to the financing structure looks inevitable. At some stage, domestic tuition fees will surely need to be reset and indexed to inflation — as unpalatable as that choice may be, given the already high levels of UK student debt. There may also be a case for differentiating fees to reflect their cost of delivery and future value to undergraduates, as Shitij Kapur, vice-chancellor of King’s College London, has argued. A nurse and a dentist who graduate in England pay essentially the same for their education – even though the cost of educating the latter is much greater, Kapur wrote in a November study.

In the meantime, expect more retrenchment, consolidation of courses and even mergers. Sharing administrative functions such as finance, human resources and technology is an obvious cost-saving route for institutions that are geographically close to each other. This process is just getting started.

And if you have children likely to enter university in the next few years, get ready to pay more.

Bloomberg