Higher education funding

Approximate read time: 10 minutes 

On 12 September 2024, the House of Lords is due to debate the following motion:

Lord Krebs (Crossbench) to move that this House takes note of the crisis in higher education funding.

As education is devolved, the majority of this briefing will focus on higher education in England.

1. How is higher education in England funded?

Higher education in England is funded through multiple channels.^[1] The Higher Education Statistics Agency (HESA) categorises these sources of income and their proportion towards total funding for the academic year.^[2] For 2022/23, the latest academic year for which HESA has published figures, these sources of income are as follows:

• tuition fees and education contracts: 53 percent
• funding body grants: 12 percent
• research grants and contracts: 14 percent
• other income: 17 percent
• investment income: 2 percent
• donations and endowment: 2 percent

The majority of students can access government loans, provided by the Student Loans Company, to help meet the upfront cost of tuition fees and living costs. However, these loans are unavailable to students without “home fee status”.^[3] Students begin to pay back their loans once they are earning above a certain threshold and, for those who started university from 2023/24, the remaining debt is written off after 40 years. In the 2022/23 academic year, 1.21 million full-time English and EU-domiciled students paid £9.9bn in tuition fee loans in England.^[4]

Additionally, the government provides grants to higher education providers through the Office for Students (OfS), which is the higher education regulator for England. It also provides grants through other public bodies, such as the Education and Skills Funding Agency.^[5]

In 2022/23, the total income of higher education providers in England was £44bn.^[6] This represented an increase of £3bn on the previous year (£41bn) and an increase of £16bn on 2014/15 (£28bn). Figure 1 shows the income of higher education providers in the UK since 2014/15 by sources of income.

Figure 1. Source of income for higher education providers in England, £bn, academic years 2014/15 to 2022/23

Alongside the data in figure 1, HESA noted that “previous years’ figures are based on restated figures (so the 2018/19 figures are taken from the 2019/20 return and the 2017/18 figures are from the 2018/19 return)”.^[7]

2. What challenges has the higher education sector encountered?

HESA data showed that 42 publicly funded higher education providers (27 percent) in the UK were in deficit during the 2022/23 academic year.^[8] Additionally, the OfS reported that 40 percent of providers in the country forecasted a deficit and an “increasing number” had low net cashflow for the 2023/24 academic year.^[9] Furthermore, the University and College Union at Queen Mary, University of London, recorded course closures, redundancies or voluntary severance schemes at 69 providers as of August 2024.^[10]

In a report examining the financial sustainability of higher education providers in England, published in May 2024, the OfS attributed the financial challenges faced by the higher education sector to several factors.^[11] These included the impact of inflation on costs and the real-terms value of income from undergraduates from the UK, a dependence on increased international student numbers and the impact of increases to the cost of living.

2.1 Decline in the real-terms value of income from UK undergraduates, combined with inflationary and economic pressures

Since undergraduate fees were raised to £9,000 per academic year in 2012, the statutory fee limit for domestic undergraduate students has increased once, to £9,250 in 2017, with no inflationary increase. The OfS argued that in real terms, the value of these fees was “much less” due to rising prices of goods and services and “particularly high rates of inflation in recent years”.^[12] The regulator’s analysis indicated that the real-terms value of income for teaching UK students (tuition fee plus teaching grant from UK public funding, per student) was approximately 25 percent lower than it was in 2015/16 when adjusted for inflation over time.

2.2 Reduction in domestic and international applications

The number of applications from both domestic and international students for undergraduate study in the UK has declined in recent years. Examining University and Colleges Admissions Service (UCAS) application data for domestic undergraduates, the OfS found that the number of applicants to English providers at the January 2023 deadline (for the 2023/24 academic year) had declined by 3.1 percent compared with the previous year.^[13] Additionally, the number of applications at the January 2024 deadline (for the 2024/25 academic year) had decreased further by 0.9 percent. The OfS stated that although this was a smaller decline than the previous year, it showed a “continuing downward trend in applications”.

The OfS also expressed concern about the application rate of international students. It noted that despite the sector forecasting a 35 percent increase in aggregate international (EU and non-EU) student enrolment between 2022/23 and 2026/27, there were recent indications that international recruitment had become “more challenging” for providers.^[14] Also examining UCAS applicant data, the regulator found a 4.2 percent decrease in EU applicants between 2023 and 2024. Additionally, whilst non-EU student applications through UCAS had increased by 1 percent over the same period, the growth rate increased at a slower rate compared to previous years.

Further, the latest Home Office data on sponsored student visa applications, published in August 2024, found that applications from January to July 2024 were 16 percent lower than those from January to July 2023.^[15] There was also an 81 percent reduction in applications from dependents of students. This followed rule changes introduced by the Sunak government that came into effect in January 2024, which prevented students from bringing dependants, apart from those studying postgraduate research courses or courses with government-funded scholarships.

2.3 Reliance on international student fee income

International students in the UK pay higher tuition fees for higher education than domestic students. For international students, undergraduate degree courses typically cost between £11,400 and £38,000 per academic year, whilst postgraduate tuition fees vary from £9,000 to £30,000.^[16] According to HESA, the income from the tuition fees of international students in 2022/23 amounted to £11.8bn.^[17]

The OfS stated that there was a “reliance” within the higher education sector on tuition fee income from international students to support publicly funded teaching and research activities, in addition to other student support activities.^[18] This model was described as “precarious” because:

• factors previously driving successful growth in international recruitment could “change quickly”, with recent indications suggesting an increasing risk of this occurring
• a “significant” proportion of international students were from a small number of countries
• recruitment could be influenced by numerous factors, including political and economic circumstances in specific countries, international relations and global higher education competition
• higher fees for international students meant that small changes in recruitment could have a “greater impact” on a provider’s financial performance and the sustainability of publicly funded teaching and research across the sector

2.4 Estate management and reducing carbon emissions

The OfS warned that prolonged underinvestment in facilities could result in “deterioration in condition and functional suitability, and an accumulating future investment need”.^[19] It also stated that the sector faced “significant investment needs” to meet carbon reduction goals and achieve “important” net-zero targets. It highlighted a report by the Association of University Directors of Estates in 2023 that estimated the needed investments at £37.1bn.^[20] The OfS argued that such expenditure was “unlikely to be affordable in the current financial environment”.

2.5 Cost of living difficulties for students and staff

The OfS observed that “continued increases in the cost of living” were impacting prospective students’ decisions regarding whether and when to enter higher education, as well as the ability of existing students to complete their studies.^[21] The regulator also noted that increases in the cost of living were impacting staff in higher education, placing “significant pressure” on providers to increase salaries to “mitigate rising living costs”.

3. Recent proposals on the challenges facing higher education

3.1 Labour government

In its general election manifesto, the Labour Party stated that the higher education funding settlement “does not work for the taxpayer, universities, staff or students”.^[22] Therefore, it committed to creating a “secure future” for higher education and pledged to work with universities to “deliver for students and our economy”.

In July 2024, the Labour government was asked in a written question what its plans were to review the higher education funding model and whether it would take steps to ensure the sustainability of university funding through a model that balanced the needs of students with constraints on public finances.^[23] Responding, Janet Daby, a parliamentary under secretary at the Department for Education, stated that the government was “committed to a sustainable funding model, which supports high value provision, thereby powering opportunity and growth and meeting the skills needs of the country”. She also said that the government would keep the higher education funding system “under continuous review” and that an announcement on student finance arrangements for the 2025/26 academic year would be made “in due course”.

In August 2024, there were media reports that civil servants in the Department for Education had drawn up several options for the education secretary to consider, to address the financial challenges facing universities. This included potentially increasing annual tuition fee rates.^[24] However, the secretary of state for education, Bridget Phillipson, told Sky News that it was “unpalatable” for the government to consider raising tuition fees. Instead, she stated that the government intended to “reform the system overall”.^[25]

3.2 Other funding proposals

In April 2024, the Higher Education Policy Institute published a collection of essays on undergraduate degree funding. In his essay, James Purnell, former Labour secretary of state for culture, media and sport and secretary of state for work and pensions, and the current president and vice-chancellor of the University of the Arts, London, proposed two funding options: replacing the student loan system with a graduate tax “tied to income”, which he described as “genuinely progressive”; or introducing a stepped repayment system, which he argued “would not require such a major overhaul of the system”.^[26] Under the stepped repayment system, graduates would repay loans at a rate of 3 or 6 percent instead of the current rate of 9 percent, with real interest rates rising to between 0 and 3 percent based on income. The repayment period would also be reduced from 40 to 30 years. Mr Purnell stated that this would save the government £841mn a cohort.

Former Conservative minister of state for universities and science and minister of state for universities, research and innovation, Lord Johnson of Marylebone also proposed changes to undergraduate degree funding. He stated there was “nothing wrong” with the existing funding model, except for “two easily fixable flaws”: fee values being “eroded” by inflation; and there being “no link” between fees and education quality.^[27] He suggested reintroducing a policy from when he was a minister in the Cameron government that allowed institutions that offered high-quality teaching and generated good student outcomes, as assessed by the teaching excellence framework (TEF), to raise fees in line with inflation. The policy ended following the 2017 general election.^[28] Lord Johnson noted that, had inflationary uplifts continued since 2017 through the TEF, it “would have maintained university funding on a much more sustainable footing”.

In June 2024, the Institute for Fiscal Studies (IFS) examined the higher education sector’s financial challenges and the options for the next government to address them.^[29] It said the “cheapest” and “most straightforward option” for an incoming government to address the sector’s “worsening finances” would be to allow the cap on tuition fees to expire at the end of the 2024/25 academic year. The organisation argued that this would be worth £270mn to the sector in the first year and £1.8bn by 2029/30 compared to a continued freeze of fees. It noted that a quarter of the cost would be borne by the taxpayer through capital spending. The rest would come from students, mostly through higher student loan repayments in their 40s and 50s. Alternatively, the IFS proposed increasing per-student teaching grants for universities. However, it stated that this would be “much costlier for the taxpayer than increasing fees”.

In the same month, Vivienne Stern, the chief executive of Universities UK, an organisation which represents 141 universities, told the Financial Times that her organisation had proposed measures for a new government to address the financial challenges facing universities.^[30] She called for a new government to “stabilise the system” through “three immediate steps”. These were to provide “a backstop mechanism to avoid university insolvency”; send “clear signals” to international students “that they were welcome”; and raise student fees and maintenance loans in line with the retail price index. Ms Stern added that these measures would “create financial and political space for a wider review of university financing”, including changes to the loan repayment system “that would take years to implement”.

4. Read more

4.1 Parliamentary research briefings

• House of Commons Library, ‘Higher education funding: Trends and challenges’, 16 July 2024
• House of Commons Library, ‘Higher education student numbers’, 2 January 2024
• House of Lords Library, ‘Financial pressures on higher education’, 21 March 2023

4.2 Articles and commentary

• Richard Adams, ‘England’s universities still waiting for help to stop slow-motion financial crisis’, Guardian, 9 August 2024
• Sir Chris Husbands, ‘Four possible futures for English higher education after the election’, Higher Education Policy Institute, 6 June 2024
• Richard Windsor, ‘UK universities: Why higher education is in crisis’, The Week, 29 May 2024

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Cover image by WOKANDAPIX from Pixabay