English universities face severe deficits if student numbers fall, says OfS
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Universities in England face an intense period of belt-tightening with mergers, course closures and redundancies as the financial outlook for one of the UK’s most successful export sectors is set to deteriorate.
The Office for Students said in its annual report on the sector’s finances that a downturn in the market for international students combined with a decade-long freeze in domestic tuition fees had rendered university growth forecasts unrealistic.
Susan Lapworth, OfS chief executive, accused institutions of “optimism bias” for using projections of 35 per cent growth in international entrants and 24 per cent in domestic entrants between 2022 and 2026.
She said the report was “a signal to all institutions to re-test their assumptions about increases in UK and international students”, adding: “The numbers reported to us for the sector as a whole are just not credible.”
The report by the higher education regulator follows warnings from the OfS of a looming funding crisis for the sector as a result of declining student applications, reported by Financial Times.
Data from Universities and Colleges Admissions showed domestic admissions fell by one per cent in 2023. Deposits paid by foreign students for 2024 suggest international student admissions have fallen by up to 60 per cent so far this year.
In submissions to the regulator, universities forecast that their income would rise by almost £10bn over the next three years, with £5bn coming from international students and £2bn from increased domestic undergraduate fees.
But OfS modelling of scenarios where universities failed to hit their forecasts indicated high levels of financial stress over the next three years.
Roughly 40 per cent of universities expect to run a deficit this year. According to the modelling, that figure would jump to 90 per cent if overall student entrants fell by 35 per cent in 2026, resulting in net income falling by £9.7bn against current forecasts.
University leaders are at loggerheads with the government over its migration policy, which has led to a sharp contraction in the number of international students applying to English universities.
The OfS warned that “further and bolder efforts to make cost savings” would be needed, leading to “significant rationalisation” of courses, as well as mergers and reduced research activity.
It added that while some retrenchment would drive “positive change and innovation”, there were risks that cuts could have “a negative impact on the quality of student’s education and their wider experience”.
More than 50 universities are in the process of cutting jobs and closing courses as the funding squeeze bites across the sector following a decade of expansion.
Following the release of the OfS report, both university bosses and the University and College Union called on future governments to commit to a new funding settlement for universities.
The sector demands include allowing tuition fees to rise in line with inflation, increases to teaching and research grants and no further changes to immigration policy.
“The alternative is institutions being hollowed out, geographic cold spots where courses are unavailable, and less opportunity for future generations — harming our society and economy,” added UCU general secretary Jo Grady.
Tim Bradshaw, chief executive of the Russell Group of research universities which are generally less exposed than those at the lower end of the sector, said any further restrictions on immigration “would significantly destabilise the sector”.
Universities UK, the main sector lobby group, said that while the sector was taking steps to “steady the ship” the cuts would have unintended consequences for students, regional growth and the economy.
“One university closing a languages or humanities course might not seem to matter. Lots of universities doing this together leaves the country with significant knowledge and skills gaps,” said UUK chief executive Vivienne Stern.
The Department for Education said it was contributing a total of £16.5bn to the sector in the form of tuition fee loans and teaching grants.
“Universities are independent from government, and it is for them to decide on how best to manage their finances. Along with the OfS, we will continue to monitor financial sustainability in the sector closely,” a spokesperson added.
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