Table of contents

1. How is higher education funded?

The higher education system is supported by various income sources. The Higher Education Statistics Agency (HESA) categorises these sources as below—the proportion of funding from each source for the academic year 2020­­–21 is included in brackets (this does not sum to 100% due to rounding).

1. Tuition fees and education contracts (53%)

2. Funding body grants (14%)

3. Research grants and contracts (15%)

4. Other income (16%)

5. Investment income (1%)

6. Donations and endowments (2%)

Government financial support comes primarily through the first two of these sources.

In terms of direct support, the government provides grant funding to universities in England through two main funding bodies: the Office for Students (OfS) and Research England. The secretary of state usually writes to these bodies around the turn of each year to set out funding, priorities, student numbers and related matters for the following financial year.

Income from tuition fees for UK-based students also relies significantly on government-backed ‘student loans’. The government pays tuition fees to universities up front and students repay over the course of their working careers. Unlike traditional personal loans, repayments on these loans are income contingent and begin being repaid once the graduate’s income reaches a certain threshold, with repayments based on a percentage of earnings above that threshold. After a set number of years—currently 40—the obligation to make repayments ceases. Given these conditions, it is estimated that a large proportion of loans made under this system will never be paid back. For example, the government forecasts that it will ultimately subsidise 44% of full-time undergraduate higher education loans issued in the 2021/22 financial year.

The balance of support between home fee income (tuition fees for UK students) and funding body grants has shifted significantly over the last decade or so. Tuition fee income rose sharply from 2012 when the government raised the cap on tuition fees for new students to £9,000. At the same time as the tuition fee income from UK-based students increased, the government reduced the direct public funding it provided for teaching through the research councils. As such, the comparative reliance on each of these two funding mechanisms was reversed. In 2010/11, funding council income (£7.3bn) was almost 2.9 times the level of fee income (£2.5bn), but by 2021/22 fee income (£10.3bn) was almost 2.7 times the level of funding council income (£3.8bn).

In terms of the overall level of funding through these sources, the increase in the home fee income after the fee cap was increased outweighed the reduction in funding body grants, such that total income from these two sources increased in real terms by around 14% from 2010/11 to 2015/16. From this point onwards, however, growth was much lower. Income from home fee income and funding body grants has increased by 2% in real terms from 2015/16 to 2021/22.

However, the figures cited above do not include tuition fee income from overseas students, which has been growing rapidly. HESA data shows that non-EU fee income rose from £4.7bn in the 2016–17 academic year to £7.4bn in 2020–21, an increase of around 12% per year. This growth increased the share of non-EU fee income, as a proportion of total income, up from 13% in 2016–17 to around 17% in 2020–21.

The chart below, drawing on HESA data, illustrates how growth in tuition fee income has been the main source of income growth for higher education providers over recent years.

Graph showing different sources of income for higher education providers from 2014/15 to 2020/21
Figure 1: Source of income for higher education providers

The chart also illustrates how higher education providers receive two other substantial sources of income. First, ‘research grants and contracts’: universities are free to apply for research grants from a variety of sources, including industry, charities, research councils or other public bodies. These research grants typically allocate funding through an open competitive process, in contrast to the direct funding provided through the funding body grants. The second source is described as ‘other income’. This consists of residences and catering activities, grants from local authorities and public sector bodies unrelated to teaching or research, income from intellectual property rights, and other miscellaneous sources not captured by the other categories.

The HESA website provides definitions for all of the different sources of income, as well as a detailed breakdown of the income received through each source for all higher education providers.

2. What financial challenges does the sector face?

2.1 Long-term sustainability

In a June 2022 report on the financial sustainability of the higher education sector in England, the House of Commons Public Accounts Committee described higher education providers as facing “long-term, systemic, pressures on their financial sustainability and viability”. The report cited evidence from a March 2022 National Audit Office report that the proportion of higher education providers with an in-year deficit had increased from 5% in 2015/16 to 32% in 2019/20.

The OfS—which regulates higher education providers—has recognised concerns raised by the Public Accounts Committee about the financial sustainability of the sector but suggests that “the likelihood of multiple providers closing unexpectedly due to financial failure remains low now and in the short term”.

The declining real-terms value of tuition fees for domestic students is commonly cited as the primary cause of such pressures. In his summer Budget 2015, then Chancellor George Osborne had announced that universities offering ‘high teaching quality’ would be allowed to increase fees in line with inflation from 2017. However, in late 2017 the fee cap was frozen at £9,250 by Theresa May’s government, and has not been uprated since.

Mark Corver, director of higher education consultancy DataHE, calculated that the real-terms value of an annual £9,000 tuition fee in 2012 had been reduced to £7,760 by 2020. This reduced the amount that universities had to spend per student by 15%. This is also in line with the Institute for Fiscal Studies analysis that up front spending on teaching resources per higher education student is 18% lower in 2022–23 than it was in 2012–13.

Mr Corver suggests higher education providers are prioritising the admission of overseas students, who pay higher fees, as a response to the declining real-terms income received from admitting domestic students. In September 2022, the Financial Times reported that ‘high ranking’ institutions were limiting admissions to domestic-based students on that basis.

In the final report of the Times Education Commission, published in June 2022, Adam Tickell, vice-chancellor of Birmingham University, confirmed that increasing international student numbers was a key strategic consideration for universities such as his. Mr Tickell said it no longer made economic sense to expand the number of places for domestic students and that increasing international student numbers was the “only relevant thing we have to increase income”.

The House of Commons Public Accounts Committee has raised concerns that the “medium- and long-term financial sustainability of some providers is heavily dependent on continued growth in student numbers, particularly overseas students”. It notes that the “market” for international students is “very competitive” and the projections of some higher education providers about the growth of international students had been over-optimistic in the past.

In reference to these concerns, the committee recommended that the Department for Education set out “what it considers to be the risks to achieving the continued forecast growth in overseas student numbers universities are relying on for their future financial security, and explain how it is mitigating those risks”. More broadly, the committee recommended that the OfS make greater efforts to understand the sector and the financial pressures it is facing in more detail.

The committee’s investigation followed a “wide-ranging” government review of post-18 education and funding. The policy statement, published upon the conclusion of the review in February 2022, announced an uplift in grant funding for the financial years 2022/23 to 2024/25. This included £300mn extra funding for the strategic priorities fund, as well as £450mn of extra capital funding to support “high-cost, high-return subjects, such as sciences, medicine and engineering”. However, the review left the fundamentals of the tuition fee system intact, with the fee cap for domestic undergraduate students remaining frozen at £9,250 up to and including the 2024–25 academic year.

In response to the review, the chief executive officer of University Alliance—a body representing professional and technical universities—Vanessa Wilson argued that, while the extra grant funding was welcomed, the continued freeze of tuition fees was “at total odds with the government’s stated commitment to increasing quality in higher education”. Ms Wilson said the student finance system was “fundamentally broken” and that a new funding settlement which is “fair and sustainable for all graduates, higher education providers and the taxpayer” is necessary.

2.2 Short-term pressures

In addition to challenges concerning longer-term financial sustainability, higher education providers are also facing increased short-term pressures. For example, Marc Finer, KPMG’s UK head of higher education debt advisory, suggested that it was previously hoped that 2022–23 would see “strategic invigoration” and a “return to investment” by universities who had cut back on capital spending during the pandemic, but that increased energy costs, borrowing costs and higher inflation had created renewed budgetary pressure. Mr Finer argued that further postponement of capital projects was a risky option for universities, as it may lead to operational concerns “about the estate and the quality of student experience” which risk deterring students and creating more fundamental financial challenges.

Supporting students struggling with the increased cost of living represents an additional short-term pressure. According to a recent Russell Group survey, one in four students regularly go without food and other necessities because they cannot afford them. Separately, the Sutton Trust reports that around half (49%) of undergraduate students have missed classes this academic year in order to do paid work. Universities UK—a body which represents the sector—has argued that, although universities would like to do more to help students with the cost of living, their ability to do so is limited by their “severely stretched funding base”. Universities UK suggests the government will need to step in with additional resources if those most in need are to be adequately supported.

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Cover image by Dom Fou on Unsplash.