Last updated on Wednesday 11 Jan 2023 at 4:39pm
We need to have a conversation about how universities are funded.
The current university funding system aims to be fair to students, graduates, the public and universities. But the cost of living crisis is increasingly putting it under strain.
We want to explore how we can create a system which is fairer to all, and supports the long-term ambitions of our universities to educate the next generation.
Sign up to hear more about our work to open the national conversation on university funding.
At its best, the UK higher education sector is a remarkable engine for economic growth, world-leading research, and high-quality education:
We want a higher education system that can:
UK universities are already delivering many of these ambitions, but we know there is more we can do.
While the 2012 tuition fee reforms initially bolstered the sector’s finances, facilitating many of the achievements we have seen, the cracks are beginning to show.
The fee system is politically contentious and unpopular with both students and universities. Fees have been stagnant, with the £9,250 headline fee (for English universities) now worth £6,585 to universities – and students are no happier about these fees than when they were introduced. The fee income available in Scotland, Wales and Northern Ireland is even lower.
This strain is being seen in universities’ own financial data. The proportion of English universities reporting an in-year deficit has increased from 5% (2015–16) to 32% (2019–20). This year, the Public Accounts Committee indicated that this increase is a serious concern for the ongoing financial health of the sector.
In English institutions, net operating cashflow has decreased from 8.4% of income (2019–20) to 4.2% (2020–21). Cashflow is a crucial part of long-term sustainability.
For institutions where strong surpluses are recorded, this is due to building projects that were paused during the pandemic, or ongoing vacancies in university staff. These savings cannot be maintained indefinitely.
English universities have managed shrinking income so far with 'sensible and prudent financial management' according to the Office for Students (OfS), making financial efficiencies where needed. Universities in the devolved administrations have needed to adjust even further due to lower income. However, there are only so many efficiencies which can be made before needing to fundamentally rethink our working models.
Under increased funding pressure and rising costs, universities will need to manage their finances differently. This may mean compromises in teaching or research, damaging our hard-won international reputation and putting pressure on students and staff.
By default, universities make a loss on domestic teaching, and a substantial loss on research. This loss is increasing each year due to inflation. In England, domestic tuition fees have been capped at £9,250 since 2017. This is now worth £6,585 in 2012 prices, and will erode more quickly with high inflation.
Fees are currently fixed until 2024–25. By this time, funding to institutions will be at its lowest point since the 1990s – while graduates pay more than ever.
Every year that this income is devalued, universities have to make equivalent additional savings elsewhere. Most other income streams are not large-scale enough to make up these shortfalls, and are expensive to scale up.
The strain means that universities need to increase surplus-generating income streams to cover the same costs as the year before. These streams include particularly, but not exclusively, recruiting international students.
There are growing concerns on universities expanding domestic and international numbers, with some citing an over-reliance on international students and fears that expansion contributes to accommodation shortages.
We’re seeing the impact of ongoing cuts which institutions have had to make. Ongoing pay disputes among staff, as well as course and campus closures at some universities, show the challenging decisions which are being made.
Universities receive money from a variety of sources, but tuition fees and grants for research and teaching are by far the most significant sources of income for most institutions.
While universities receive money designated for teaching (such as tuition fees) or research (such as grants), university funding is often managed as a whole. This means we need to look at the big picture to understand university funding. We can’t fully understand teaching funding without considering research, and vice versa.
Across the UK, student fees depend on where the student is from, and where they are studying. While English students pay up to £9,250 both in England and in other nations (£9,000 in Wales), Wales, Scotland and Northern Ireland have their own arrangements for their students.
Across the sector, domestic and international tuition fees account for 52% of all income.
Before 2012, the majority of university income for universities across the UK came from a central public grant. In 2012, this grant was cut, and teaching funding shifted towards tuition fees instead (except in Scotland, where the central grant remains for Scottish students). While universities still receive a grant, this has declined significantly over time. In 2021–22, the central grant for English universities was at its lowest point in history.
Fees and the central grant do not cover the full cost of teaching. For English universities, the OfS reports that domestic funding covers 97.5% of teaching costs, while the Russell Group reports a deficit of £1,750 per student.
Welsh students and students from elsewhere in the UK pay up to £9,000 at Welsh universities. The student maintenance package for Welsh students is the most generous in the UK, with higher headline figures and a mixture of grant and loan. This means that Welsh universities have less resource than English ones, but Welsh students receive more direct support on average.
Scottish students at Scottish universities do not pay tuition fees, but students from elsewhere in the UK pay up to £9,250. In Scotland, cash terms funding per Scottish student is £7,700 compared to £9,250 in England. Similarly to the rest of the UK, inflation has eroded the value of this funding, with a loss of £2,325 per student since 2014.
In Northern Ireland, Northern Irish students pay £4,630, with government grant accounting for a higher proportion of funding per student. There has been a greater decline in funding per student in Northern Ireland than in England.
There is an opportunity to reflect on a more sustainable UK-wide system, which is clear and fair for students as well as ensuring high quality across the board.
While the cost of living crisis hits students, the student maintenance package in England is at its lowest value in seven years. Students are also eligible for much lower maintenance loans than when the system was designed, as the parental earnings threshold has been frozen since 2008.
The 2022 reforms to tuition fees altered how student repayments will work. While these reforms are England-specific, they will likely have an impact on the loan system in Wales and Northern Ireland.
Under the 2012–22 system, the government would write off around 50p of every £1 taken out in student loans. Following the 2022 reforms, it is expected that Treasury will write off around 20p for every £1 taken out from 2023 onwards.
Many more students will repay their full loan than under the 2012 system, with the highest earners paying less than before and low and middle earners paying more.
University research across the UK is funded by a system with two primary streams. The first stream is Quality Related (QR) funding, which is based on universities’ performance. The second stream is grant funding, where specific projects compete for grants.
Public research funding is designed not to recover the full economic cost (fEC) of undertaking research.
In 2020–21, only 71% of research costs in England were covered by funding. This is similar across the UK. Universities need to use teaching funding, and income from elsewhere, to make up this shortfall. If this cannot be covered, universities will have to reduce or stop research activity altogether.
Universities receive income from other sources, including:
At a sector level, these combined income sources account for 19.3% of all income. While these smaller income streams can support the wider financial picture, for most institutions it is very difficult – and costly – to scale these up to support the core activities of teaching and research. Current data shows that other 'income' generating streams make an over 10% loss at a sector level.
Another element of university finances is surpluses, which are sometimes used as evidence that universities are sitting on substantial amounts of cash. Surpluses are needed to fund capital expenditure over time and to withstand shocks, such as the Covid-19 pandemic, without needing to close courses or make redundancies at short notice. The OfS emphasises that it expects financially healthy universities to make a surplus to ensure sustainability.
Even prior to the 2022 reforms, the UK had 'the lowest share of public funding in tertiary education among OECD member countries', with this figure at 24% compared to the OECD average of around 66%.
England and Wales also have the highest domestic undergraduate fees in the OECD, including the semi-privatised US system.
We spend 20% of our higher education expenditure on research and development, which is substantially lower than the OECD average of 29%. This highlights the success story of UK research under these conditions, but also shows that we cannot afford for this to slip further.
We have an opportunity to reflect on how well the current system works for students, graduates, the public and universities – and whether there are better options.
Join the conversation by signing up to hear more about our work on university funding.
Our funding task and finish group will facilitate this national conversation. We want to engage with stakeholders from all walks of life to find a fairer way forward.
Task and finish groups are groups set up to advise our Board on a programme of work. Their purpose is to help deliver our aims as an organisation.
Chair: Professor Jenny Higham, St George’s, University of London, Vice-Chancellor
Professor George Boyne, University of Aberdeen, Principal and Vice-Chancellor
Professor Edmund Burke, Bangor University, Vice-Chancellor
Professor Chris Day, Newcastle University, Vice-Chancellor and President
Professor Alistair Fitt, Oxford Brookes University, Vice-Chancellor
Professor Jane Harrington, University of Greenwich, Vice-Chancellor
Professor Karen Holford CBE, Cranfield University, Chief Executive and Vice-Chancellor
Ms Alison Jarvis, University of Plymouth, Chief Financial Officer
Professor Charlie Jeffery CBE, University of York, Vice-Chancellor
Professor Neal Juster, University of Lincoln, Vice-Chancellor
Professor Koen Lamberts, University of Sheffield, President and Vice-Chancellor
Professor Helen Marshall, University of Salford, Vice-Chancellor
Professor Trevor McMillan OBE, Keele University, Vice-Chancellor
Professor Sir Anton Muscatelli, University of Glasgow, Principal and Vice-Chancellor
Mr James Purnell, University of the Arts London, President and Vice-Chancellor
Professor Lisa Roberts, University of Exeter, Vice-Chancellor and Chief Executive
Professor Andy Schofield, Lancaster University, Vice-Chancellor
Professor Mark Smith CBE, University of Southampton, President and Vice-Chancellor
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