UK Universities are Bankrupt

Universities are one of the few things the UK still does well.

British universities like Oxford and Cambridge are widely considered some of the best in the world and hundreds of thousands of young people come from all around the world to study in the UK every year.

Unfortunately, like basically everything else in the UK, universities are running out of money with many universities borrowing significant sums just to stay afloat and industry insiders have recently started warning about the risk of outright bankruptcies in some of the UK's biggest universities.

So in this letter, let’s have a change of pace and look at the UK’s emerging university crisis.

So simply put, the fundamental issue for UK universities is that they're just not getting as much money as they used to for three reasons.

Loss of EU Funding

When the UK was part of the EU, UK universities received roughly 800 million EUR a year in financial support, as you might expect, since Brexit, that number has fallen to basically zero.

The government promised to replace these funds with a combination of loans and grants including the so-called shared prosperity fund and the recent announcement that the UK would be rejoining the EU's Horizon Funding Scheme should take some of the pressure off but universities have complain that the funding allocation is unpredictable and the total sums involved don't always add up.

Inflation

For those of you who don't know, in England, accredited universities and colleges are allowed to charge a maximum tuition fee of £9,250 per year for full-time undergraduate courses which is basically what they all charge.

Now this might sound like a lot of money and it can feel like it when you're paying off your student loans but this number has barely changed since 2012 when tuition fees were first introduced at £9,000.

They went up by £250 in 2017 but this is obviously miles behind inflation and analysis by DataHE suggests that the £9,000 fee originally introduced in 2012 would now be more than £12,000 if it had increased in line with consumer prices.

This has also forced universities into essentially spending less money on tuition with real-term spending falling by nearly 20% in the last few years .

Lack of Overseas Students

Since tuition fees haven't risen with inflation, UK universities today basically make a loss on British students. A recent analysis by the Russell Group for instance found that it cost about £11,750 to teach your average student implying that universities make a loss of about £2,500 per student which is expected to increase to nearly £5,000 by 2030 as inflation continues to eat away at the real value of tuition fees.

So far though, universities have been able to make up for this growing deficit by bringing in more and more international students who generally pay about twice as much as British students or roughly about £20,000 each.

The fraction of total income from non-EU International students has now risen from less than 5% in the 1990s to about 20% today and in 2022 (the latest year for which the government has published data), there were nearly 700,000 international students studying in the UK.

However, this strategy has become increasingly difficult for a couple of reasons.

First, in an attempt to attract more international students, certain universities have started lowering entry requirements for international but not British students.

The University of York for instance, now admits international students with the equivalent of a BBC at the A-levels while typically requiring AAA from British students.

This has become politically controversial and upset some British students who feel they're losing out on university places just because the UK's higher education model is broken.

Second and perhaps more pertinently international students have become rolled up in the government's efforts to reduce net immigration into the UK which hit an unprecedented high of 745,000 in 2022.

Quite a lot of this was driven by student visas in 2022, the home office issued nearly 500,000 study visas and a further 140,000 visas for dependents, i.e. students partners and children's, an eight-fold increase compared to 2019.

In an attempt to bring these numbers down at the beginning of the year, the government banned students from bringing dependents into the UK.

While this policy is defensible, after all that eight-fold increase does suggest the system is being gamed in a sense, it was accompanied by some pretty aggressive language, which was widely reported in the international press and has apparently spooked some international students.

How to Solve It?

Universities are running out of money in the UK and this is particularly bad news because universities are one of the few things the UK still does well.

World rankings consistently show that the UK has more top rated tertiary education institutions than the rest of the EU put together with Oxford, Cambridge and Imperial reliably appearing in the top 10.

Unfortunately, there's no obvious answer, neither political party wants to significantly increase public spending and it's hard to imagine the electorate tolerating higher taxation to fund a sector that many voters see as an overly politicized industry designed for out-of-touch elites.

Raising tuition fees isn't a great fix either given that the government already estimates about 40% of students will never fully repay their loan.

Similarly, moving towards a system where prices better reflect the actual value of different degrees makes economic sense but might price out poorer students from more prestigious degrees.

Nonetheless, it's imperative that this government or the incoming labor one gets this right given universities are both one of the UK's top exports and an effective vehicle for British soft power.