Why are universities facing a funding crisis and how can they solve it?

The "golden age of higher education" could be coming to an end, the university watchdog said as it declared "all options" should be on the table for helping the sector with its financial struggles.

Sir David Behan, interim chairman of the Office for Students (OFS), said universities have suffered setbacks from a "number of different forces", including "industrial action, the cost-of-living crisis, the increasing cost of pensions and decreasing number of international students".

Domestic undergraduate fees "remaining frozen since 2012" are also driving some universities towards "significant" fiscal deficits. The Times reported “at least three” universities are understood to be “in serious peril”.

“It’s important that universities revise their medium-term financial strategies… they can’t just carry on,” said Behan.

However, a decision to raise university tuition fees, no matter how much vice chancellors are calling out for it, is never going to be a popular one. Here, Yahoo News takes a look at how the UK's universities got here, and what could be done to resolve their funding crisis.

Why are universities struggling?

Up until 2022, universities generally managed with their cost pressures thanks to "annual efficiency measures, accompanied by modest increases in home undergraduate student numbers and more ambitious international growth", writes Professor Sir Chris Husbands writes for King's College London.

Then, the world faced a series of economic shockwaves including the COVID-19 pandemic, Russia's invasion of Ukraine, rising energy prices and a sudden surge of inflation.

Adding to this mounting pressure is a drop in higher-paying international students – a significant source of university funding – after the previous Conservative government introduced restrictions on sponsored study visas.

OFS head Behan told the Sunday Times: “I think the resilience of the sector overall has been tested by a number of different forces… the global pandemic, the impact of leaving the European Union.

“There’s been unprecedented political change across our governments over the past few years, in terms of secretaries of state and continuity,” he said.

“We’ve had industrial action, the cost-of-living crisis, the increasing cost of pensions and decreasing number of international students, and then, finally, domestic undergraduate fees remaining frozen since 2012… and what it’s meant is that the fiscal deficit for some organisations is significant.”

Will university tuition fees be raised?

Behan has called on universities to explore mergers or partnership arrangements with other institutions, amid fears some institutions could be facing bankruptcy.

Many university leaders have been calling on the government to raise the annual tuition fee for domestic students in line with inflation to help institutions struggling financially – but this is easier said than done.

The cap on tuition fees was raised from £3,000 per year to £9,000 in 2012, and then raised once more to £9,250 in 2018.

Labour peer Peter Mandelson, who served under Tony Blair's government when tuition fees were first introduced, suggested that while the "onerous" student loans system needs reforming, fees would probably have to be raised in the short term.

“This cannot be turned round overnight by a new incoming government but there will need to be some emergency uptick in resources to save both university teaching and vital research," he told the Guardian.

Meanwhile Conservative peer David Willetts, who was universities minister when the £9,000 cap was introduced, warned the "costs of doing nothing are rising all the time".

He said students are bearing the brunt by receiving a "worse quality higher education experiences" while some universities risk going bust. Former ministers have suggested an increase of £2,000 to £3,500 a year is needed. However, Labour MP Margaret Hodge, who served as universities minister between 2001 and 2003, said such a move would be "politically impossible".

Prime minister Sir Keir Starmer has ditched his Labour leadership campaign pledge of scrapping tuition fees altogether, deciding he wanted to prioritise putting money into the NHS.

In July education secretary Bridget Phillipson confirmed Labour has "no plans" to raise university fees or funding, telling the BBC’s World at One that the government would support the recruitment of more international students.

How much do universities make from international students?

One in six universities get more than 33% of their total income from overseas students, according to analysis by FactCheck.

Tuition fees used to make up around 64% of universities’ total teaching income in 2012, but cuts in government funding have left institutions increasingly reliant on fees.

And with a cap on domestic fees, universities have naturally been looking to foreign students, who are charged an average of £22,000 per year for undergraduate courses, according to Parliamentary research.

So, when the previous Conservative government brought in new visa restrictions in January banning most international masters students from bringing over family members and other dependents, the UK Council for International Student Affairs called the move "deeply disappointing".

Home Office figures for July show around 15% fewer sponsored student visa applications were received that month. Between January and the end of July, overall student applications were down by 16% compared with the same period last year.

Meanwhile data from more than 60 UK universities shows the number of study visas issued has fallen by 33% this year compared with the same time in 2023, the Guardian reported in February, with universities pointing to steep visa fee increases, new restrictions and threats to cut graduate work entitlements.

Labour's education secretary Bridget Phillipson has said it does "not intend" to lift visa restrictions on international students, despite emphasising their value to the university system.

“It is not the case that international students are taking places that would’ve otherwise been available to domestic students, in fact they are cross subsidising students from the UK, and we’ve seen a drop in undergraduate admissions from international students in this phase," she told Sky News.

Could some universities go bust?

Higher education minister Baroness Jacqui Smith did not rule out some universities having to close during an interview with Sky News in July.

"I don't want that to happen. And I'm concerned that students are still able to get those opportunities," she said.

Smith said it was "in the hands of universities to take the action necessary in order to be as efficient as possible", adding: "I'm willing to work in partnership to ensure that that happens."

Former home secretary Suella Braverman actually welcomed the possibility, telling BBC Panorama: I think what we’ve got to accept is that some universities may well go bust... They may well close. And I don’t think that’s necessarily a bad thing.”

Phillipson said in July that she was “determined to develop a brighter future for universities” but warned they shouldn't expect a bailout from the taxpayer.

“Universities are autonomous and there are expectations around how they manage their budgets and I would expect them to do that without seeking any calls on the taxpayer,” the education secretary said.

This may force universities to cut courses, make redundancies, merge departments or even merging with other universities, but this may further frustrate those complaining of a declining quality of courses.

Universities' decisions to hold back pay, resulting in a real-terms pay cut of 25% since 2009, saw strike action this year and last, with staff complaining of increasingly challenging working conditions, suggesting many are already at their limit.

Read more

• Teen secures place at Oxford University... after using YouTube to home-school himself (Manchester Evening News)

• Higher-tariff universities admit 13% more UK school-leavers than 2023, figures show (The Guardian)

• LSE report claiming low emission zones improve school grades branded ‘verging on irresponsible’ (The Telegraph)