How are universities funded? The HE general election issues, Day 2

• HEPI is running a seven-day blog series on important election-related issues, aimed primarily at non-specialist readers. This second piece, written by HEPI’s Director of Policy and Advocacy, Rose Stephenson, outlines the funding challenges facing higher education institutions.
• Yesterday’s piece on student voters is here (and yesterday’s HEPI / JMI webinar on the Australian Universities Accord process is here).
• If you are not yet registered to vote at the forthcoming general election, you can still register here (until 11.59pm on Tuesday, 18 June 2024): https://www.gov.uk/register-to-vote

UK universities are funded through three main income streams:

1. tuition fees and grants for teaching home students;
2. funding for research; and
3. tuition fees paid by international students, which are generally higher than the fees for home students.

The maximum annual tuition fee for English undergraduate students was raised to £9,000 in 2012 and has only increased once since, rising to £9,250 in 2017. The fee situation for undergraduates is similar in Wales, where fees are rising to £9,250 in 2024/25, while tuition fees in Northern Ireland are lower at £4,710. Students in England, Wales and Northern Ireland can take out tuition fee loans to cover the entire cost of their tuition fees, while Scottish-domiciled students studying in Scotland have their tuition costs paid by the Scottish Government.

Across the four parts of the UK, the ‘unit of resource’, which is the annual amount institutions receive to educate a domestic student, has been falling. Tuition fees in England and Wales are now worth around £6,000 in 2012 prices. In real terms, the unit-of-resource is back to where it was before fees were first reintroduced in 1998. Some have responded to this situation by floating the idea of reimposing student number controls, thereby capping the number of available places and enabling an increased unit of resource for the students who do go. However, the number of UK-domiciled 18-year-olds is set to grow each year until 2030, so this would constrain the supply of places when demand is expected to grow while limiting competition between institutions.

Public funding for university research comes from two sources: so-called Quality-Related (QR) funding, which is allocated differently in the different parts of the UK but is based on universities’ recent research performance as measured in an exercise that happens every few years called the Research Excellence Framework; and grant funding for individual projects from the UK-wide Research Councils. As with teaching home students, there is a considerable shortfall in the funding of most university-based research projects.

Institutions have responded to the underfunding of both teaching locally domiciled students and undertaking research by diversifying their funding streams, including by recruiting more international students. International students generally pay higher tuition fees, which have long cross-subsidised research and which have increasingly come to cross-subsidise the teaching of home students.

However, the international student market is not a limitless source of income due to ever-changing migration rules, universities’ own limited capacity to expand and differential demand, meaning some institutions have less demand from international students than others. Furthermore, the international student market is competitive, especially among the biggest English-speaking countries, and so it is affected by changes outside the UK Government’s direct control, such as:

• exchange rates, as seen with the recent economic troubles in Nigeria;
• global events, such as conflicts, as seen with Russia’s invasion of Ukraine; and
• other countries’ migration policies, which can affect the relative attractiveness of the UK as a place of study.

Reductions in demand from overseas, rising costs and the declining unit of resource for home students have resulted in more institutions facing financial instability. An independent analysis by the higher education regulator in England, the Office for Students, found the sector’s financial performance was weaker in 2022/23 than in 2021/22. It is expected to decline further in 2023/24, with 40 per cent of providers expected to be in deficit.

The Office for Students’ report also notes the likely impact on the availability of different options:

At a system level, we are concerned about the aggregate impact of the many discrete decisions individual autonomous institutions are making in response to significant financial risk. Across the sector as a whole this may over time reduce student choice: in some subject areas, or in some regions, or for some types of students.

Ensuring the long-term stability of the higher education sector should be an urgent political agenda item for any incoming government. There are no easy wins but the options include:

• raising tuition fees and loans for home students at least in line with inflation;
• increased direct public investment in higher education;
• increased employer investment in higher education, such as through a new levy on graduate recruiters; and
• increased investment in research, to reduce the pressures of cross-subsidies.

Action will be needed if the UK is to continue having a truly world-class higher education sector.

Further reading

• Rose Stephenson (ed.), How should undergraduate degrees be funded? March 2024, HEPI Report 173
• Shitij Kapur, UK Universities: from a Triangle of Sadness to a Brighter Future, The Policy Institute at King’s College London, November 2023