What sort of state are university finances in?

At the Lords’ Industry and Regulators Committee the other day, universities minister Robert Halfon argued that (England's) universities’ finances are “holding up well”.

Jim is an Associate Editor at Wonkhe

He also said that 75 per cent of institutions are in good financial health – and given that they have the same access to the funding system, he nudge nudge wink winked that the rest must be being badly managed:

Some of it…may be down to the management of that particular university and the leadership, rather than the funding system.”

Part of the argument was that universities have it good in comparison to other beleaguered bits of the state:

Universities get £40 billion from a variety of sources, given everything else that is going on in the economy, I think higher education is in a fairly strong position compared to other parts of the public sector.”

Of course the problem with this “we’re all in it together” style of argument is that students shell out tuition fees, and have the consumer right to what was promised for the duration of the programme. If universities can’t afford to deliver what was promised, there’s a problem.

Oh – and if 25 per cent of providers’ finances aren’t in good health, regular readers will know I argue that students applying to university really ought to know who they are.

One way to shore up everyone’s finances would be to increase the cap on fees – but in a notable moment of brass neck, argued that doing so would hit students financially:

I am not an advocate of increasing tuition fees… I think that would hit the student and that is important at a time when things are very difficult. That doesn’t mean they are never going to go up but I think the approach of the government has been the right one.”

An increase would not hit students, only graduates – and a failure to increase reduces the discretionary student financial support a university can give. Halfon is also currently overseeing changes to the student loan system that, as Martin Lewis has been pointing out, will see swathes of graduates paying twice the amount they pay now as the subsidy in the pound shifts from over 50p when 9k fees were introduced to about 14p now.

Halfon added that he was “less concerned” than others about the volume of international students and the extent to which their fees subsidise other university.

Less concerned, it turns out, than the Office for Students (OfS), which has written today to 23 providers to raise concerns about their “high levels” of recruitment of Chinese students – calling on them to develop “contingency plans” to be deployed in the event of a “sudden drop” in numbers.

It’s a disclosure that’s contained in OfS’ annual report on financial sustainability, which more generally finds university finances to be good shape while worrying about international reliance:

We continue to have concerns that some universities have become too reliant on fee income from international students, with students from one country sometimes a significant part of the financial model.

One aspect not picked up by much of the media is the stuff we get in the report on projections, which includes the revelation that providers are predicting total postgraduate student numbers (FTEs) to increase by just under 30 per cent (130,000 FTEs), the majority of which are expected to be international.

Either a) the UK’s university towns and cities have 130k empty bedspaces suitable for students lying around, b) Paul Daniels will be along any minute to magic up the bedspaces while PBSA projects complain about interest rates and landlords leave the HMO market, or c) providers are predicting widespread student homelessness.

That OfS’ definitions of sustainability avoid an assessment of whether there will be somewhere to live for the students providers say they’ll recruit markers it up as a regulator, but not necessarily an Office for “Students”.

More generally, there’s not much in here on the way in which a squeezed unit of resource might be impacting actual delivery – stepping into that breach, UCU has also published an analysis of HESA stats (think a DK blog only more alarming) which it says shows that universities generated more money than ever last year, “yet staff expenditure has hit rock bottom”.

As ever it uses an aggregate position to “reveal” that the surplus universities generated could have raised staff pay by 10 per cent with “hundreds of millions to spare”.

Does any of this give us a true picture of the financial sustainability of the sector? Sort of. There’s no doubt that Halfon, OfS and UCU have all been able to find that most providers aren’t teetering on the brink of financial collapse.

But what’s missing from the ministerial, regulatory and staff analyses here is any real understanding of what’s happening to the student experience in order to get to these numbers – as optional modules get scrapped, class sizes grow, personal tutor systems become decidedly impersonal, admin gets rationalised beyond what’s sensible and support services asked to do even more with even less.

Halfon won’t want to point that out, OfS has spent so long avoiding calling out poor quality that it now feels like it daren’t get going for fear of being seen to have tolerated it for so long (or causing a run on the bank scenario), and UCU has other fish to fry – or at least a different framing.

5 responses to “What sort of state are university finances in?

  1. The OfS analysis is always helpful and this latest update on 2021-2 HE provider finances is the first one to use OfS’s new set of provider groups analysed by David Kernohan here (https://wonkhe.com/blogs/a-return-to-type-for-the-ofs/)

    When talking about the 416 providers on their register, OfS tend to use the phrase “universities and colleges” but this latest publication on finances (like everything else they do on finance and prevent) excludes the FE colleges on their register and only covers 247, 30 of whom have not yet submitted 2021-2 data via their AFR21 data. I would have expected a bit more comment on this level of non-returns (12%)

    Another point which comes up if you compare the OfS data (247 providers) and UCU data (147 universities) is that UCU report a higher total for income (£44.6 billion) than OfS do (£40.0 billion). There’s probably an obvious explanation.

  2. “The subsidy in the pound shifts from over 50p when 9k fees were introduced to about 14p now”

    This is mainly an artefact of the discount rate used to calculate the subsidy (RAB charge) which means the value assigned to a given set of future repayments has increased massively.

    The RAB charge compares the net present value (NPV) of future repayments to the initial outlay. Since student loan reforms were enacted in 2012, the discount rate used to calculate the NPV has decreased from RPI plus 3.5% to RPI *minus* 1.1%.

    To illustrate the impact, a repayment stream of £1,000/year in real (RPI-deflated) terms over 30 years that would have been valued at £18,760 in 2012 would now be valued at £35,315.

    The change in the discount rate last year was very useful to the government as it very successfully hid the fact that the introduction of Plan 5 actually saves little money as the savings from a lower threshold/longer repayment period/abolition of earnings uprating have largely been spent on reducing contributions from the highest-earning 30% of graduates (for 2023/24, the estimated Plan 2 RAB is 28% and the estimated Plan 5 RAB is 24%)

  3. Having read the OfS’s financial sustainability report and the relevant media coverage, I am disappointed that the media paid little attention to issues other than reliance on international student fees. The OfS report flags a number of issues, including the impact of inflation and cost of living which are key financial risks. With regard to reliance on international students fees, in the current environment with high inflation and a fixed home underground fee rate, many providers have little option but to grow their international student numbers constantly (as shown in figure A2 of the OfS report) to meet their additional costs to maintain their financial sustainability.

  4. “I think higher education is in a fairly strong position compared to other parts of the public sector.” That reference to “other parts of the public sector” is concerning. The minister seems to believe universities are in the public sector, and by implication under some measure of state control, despite the lip-service he pays to institutional autonomy.

    In fact, universities have in the UK always been considered part of the private sector. Currently the ONS classifies them to the private sector, as “non-profit institutions serving households” – but will be revisiting its classification later this year. Given statements like this from the Westminster government, and the prescriptive approach taken in England by the OfS (which the minister attempted to justify on the basis of taxpayer subsidy), there’s a danger that universities will indeed become part of the public sector. I hope the ONS is discerning enough to make that change, if it has to, in England only and not in the rest of the UK.

    The potential implications are easy to see in schools – it’s not difficult to imagine a gradual slide towards national curricula and Ofsted-style monitoring in England, which would fit the OfS starting point that universities can’t be trusted and will only deliver good-quality education if the regulator forces them to. Meanwhile the more enlightened sector in Scotland and Wales, and perhaps Northern Ireland, gets to keep real autonomy, and provision improves through a collaborative, enhancement-led approach (and a sector-owned expert quality body independent of any government agency).

  5. Aggregation implies some sort of inter-institution bailout mechanism exists, which of course isn’t the case and is misleading. 25% of HEIs are in trouble financially with no prospect of such help arriving

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