Financial sustainability for the higher education sector – what’s next?

In 2021 we discussed how financial sustainability for the higher education (HE) sector could be achieved, based on the analysis published by the Office for Students (OfS). But a couple of years on, we are now analysing what might be next for the sector. The external environment for HE is turbulent, with partnerships, international students, governance, and lifelong learning all being in the melting pot.  In a time of change, the sector is reflecting on how, and what, it delivers. 

A recent report from Universities UK (UUK) based on an analysis of sector regulatory financial returns for 2022/23 highlighted that the sector is ‘facing significant financial challenges that threaten to impact the quality of provision and student outcome’.

Reflecting on the income and policy environment, we note that the sector income operating model has remained broadly constant for decades – income per student for undergraduate and postgraduate provision, and income for research activities – with various other sources of commercial and contract-based income. It feels that the time for change has arrived in the income operating model, with the lifelong learning entitlement and a renewed focus on levels 4 and 5 and apprenticeships all in the mix.

What do the numbers show for home and international students? 

In respect of home students, while UK demographics are increasing in terms of the number of 18 year olds, the fee is frozen at £9,250 and both Conservative and Labour parties have said there is no immediate plan to increase fees. The ‘benefit’ of this is that it provides some clarity and enables planning. By attracting more students onto courses that underrecruited, some institutions may be able to make this fee model work with targeted and effective marketing and communications.

Meanwhile, international students have provided a separate source of income and delivered a sector with an international focus and dynamic. 

The numbers for 2023 tell an interesting story. While EU student numbers continue to reduce post Brexit, Non-EU International student numbers have been growing and remain fundamental to sector financial sustainability. 

However, the OfS’ annual assessment of the sector explains that ‘Overreliance on overseas fees remains a vulnerability for some providers. Given geopolitical risks and changes to UK Government policy in respect of postgraduate dependents, this number could be vulnerable’.

To continue to attract the international cohorts of the past, some institutions are reviewing their offer and how it’s positioned. We also know that the government, is reviewing whether there is equity between home and international students in respect of access, and thus parity is important. 

How will the government reduce higher education costs for the tax payer?

In 2021 we discussed whether ‘rhetoric will become policy to reduce the cost to the taxpayer of higher education and to increase the flow of people into higher and degree apprenticeships’ in 2023 this policy did indeed follow. UCAS data shows that the entry rate (proportion of 18 year olds entering in HE) has declined in 2023, (down from 37.9% in 2021 to 35.6% in 2023) however it is too early to know if this is due to apprenticeship opportunities.

A recent Institute for Fiscal Studies report noted that, for the first time ever, the current student loans model may start to cost the government money, due to rising interest rates causing a substantial loss, even when loans are repaid. This may lead to a re-evaluation of the model and a reflection on the alternatives, such as ‘graduate tax’.

Where the income operating model is changing and evolving, it is necessary to review the expenditure or delivery model. Much of the current news about the sector – home student fees, international student numbers, apprenticeships, lifelong learning entitlements, the cost to the taxpayer, individual institutional decisions, and government policy regarding immigration. OfS regulation, all point towards the status quo for the HE sector no longer being a viable option. 

The three-year undergraduate degree model delivered in significant fixed physical infrastructure has remained similar for many generations. However, as the sector faces various new challenges and opportunities a sustainable, long-term strategy is necessary. A sector-led statement of intent supported by institutional visions could be a powerful story of the impact and benefit to the UK, due to competing narratives, those being:

• UK HE plc will produce the skills we need for the future and even more young people should go to University;
• graduates continue to earn a premium; and
• access, participation and outcomes continue to be inequitable and in future this will be a cost to the country, at a time of limited Government resources.

So where next?

As always, there is not one right answer and different providers will make different choices based on their historic strengths, their civic role and their vision.

This will include apprenticeships which remains a clear opportunity – though needs less physical infrastructure and different staffing models, and new compliance requirements. These factors will inform decision making about how an institution moves forward in respect of its estate and people strategies and models.

In addition, AI and tech advances provide an opportunity for the sector to provide flexible opportunities linked to lifelong learning entitlement which can be delivered very differently than a three-year undergraduate programme with more hybrid, virtual and AI learning tools deployed, again changing how, when, and for what estates are used.

Levelling up and ‘cold spots’ still need to be addressed for equality of access – this probably will not be through significant capital builds, but through use of existing spaces and through collaborations with other public and third sector entities.

We also note that the HE sector has not seen much in the way of mergers in the past. This may be more palatable than institutional failure, which without system change seems unavoidable. This is one way to streamline operating costs and potentially make the new institution more robust and, done well, can result in culturally stronger organisations that can thrive – though mergers in the education sector have not always worked, and they need careful planning and execution to ensure that the transformation is achieved.

As we noted in our most recent risk register analysis:

• With the constant evolution and revolution of digital technologies including AI, combined with climate change and geopolitical changes, it may be time to truly harness risk management strategies to show how institutions can deliver the skills and insights needed to keep UK HE plc at the forefront of global developments. 

For more information, please contact Lisa Randall, Louise Tweedie or your usual RSM contact.