The storm clouds are gathering over English higher education providers’ finances: a long-running cash-terms freeze to tuition fees and tighter restrictions on international student visas are creating a difficult funding outlook.

Despite these pressures, the Conservative and Labour party manifestos offered little indication of how either would approach higher education funding. Decisions will need to be taken at some point over the next parliament: a continued cash freeze on tuition fees while maintaining the real value of teaching grants would leave overall real resources per domestic student a quarter lower by 2029 than in 2012 (and at their lowest level since 2005).

A new report by IFS researchers, funded by the Nuffield Foundation, analyses the state of English universities’ finances over the last few years, and the policy options that a new government has available to confront this difficult inheritance.

  • Universities’ finances have fared unexpectedly well in the last five years. In 2021/22, the sector-wide surplus (adjusted for mostly one-off pension effects) was 6.1% of income.
  • Strong growth in the number of international students has shored up university finances in recent years. By 2021/22, international students accounted for a quarter of all students at English universities. But because they pay more than domestic students, international fees accounted for 44% of total tuition fee income in 2022/23, up from 32% in 2016/17.
  • However, at 3.7% of income, the adjusted sector-wide surplus in 2022/23 was lower than in most years since 2015/16, with one in five institutions now in deficit.
  • Providers’ forecasts suggest only a tiny sector-wide surplus for 2023/24, and even this is based on optimistic assumptions about strong growth in international student numbers.

This worsening financial situation is largely down to a long-term squeeze on teaching resources for UK students, which – due to a long-running cash-terms freeze in the tuition fee cap – have now fallen by nearly 20% in real terms since 2012. This is approximately the same real-terms level as in 2011 (before the tuition fee cap was trebled from £3,000 to £9,000). This continual erosion of per-student resources cannot be sustained indefinitely.

A new government could let the current freeze expire at the end of the 2024/25 academic year. In the following year, this would see the tuition fee cap rise to £9,450 and prevent a further real-terms funding cut of around £260 million. By the end of the next parliament, the cap would stand at around £10,500 on current forecasts.

Increasing tuition fees would increase student loan balances. As loan repayments don’t vary with the total amount borrowed until the loan is paid off, two-thirds of graduates from three-year courses wouldn’t make higher repayments until at least their 40s, in the late 2040s.

Alternatively, a new government could increase teaching grants to make up for the effects of a continuing freeze. Graduates would have lower loan balances to pay off, but this would be around four times as expensive for taxpayers as allowing tuition fees to increase in line with inflation.

Kate Ogden, Senior Research Economist at IFS, said: “Universities have had a string of good luck in the past few years. Student recruitment held up very well during the COVID pandemic, international recruitment – and with it the fees that they pay – has ballooned, and the deficit of the main university pension scheme has turned into a large surplus. The available data up to the 2022/23 academic year do not show a sector in a funding crisis.

But there are more recent indicators that this luck may be running out.  The reality of frozen fees for domestic undergraduates is now starting to bite, just as tighter restrictions on dependant visas for international students and uncertainty about the direction of immigration policy are hampering international student recruitment. If it wants to avoid further cuts to teaching resources, a new government will have to choose between asking more from students through higher tuition fees, or committing itself to increasing teaching grants to universities.”

Josh Hillman, Director of Education at the Nuffield Foundation, said: “The incoming government faces an unpalatable legacy that parties have not confronted in their manifestos. Higher education funding needs a drastic overhaul, it is just a question of who pays for it – graduates or taxpayers. It seems this unpopular message is one that no one wants to deliver ahead of a general election.”