Challenged universities need more than a UK tuition fee thaw

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The UK's top universities regularly score highly in international rankings. But many of their less famous peers are failing an important financial test. The recent decision to raise college tuition in line with inflation next year alone will not make much of a difference.

This prevents loss of income from teaching domestic students. But costs are also increasing. Taking into account the increase in employer national insurance announced in the Budget, the net increase amounts to an average of 45,000 per institution.

Overextension causes many problems. The funding model introduced in 2012 created incentives to maximize student recruitment without significant pressure to provide value for money. Additionally, until accounting rule changes in 2018, there was little reason for taxpayers to minimize their exposure to student loan write-offs. Universities sought to attract increasing numbers of international students. Their share of total commission income increased by 12 percentage points over the six years from 2022 to 2023, reaching 44%.

This helped bridge the funding gap caused by the domestic tuition freeze. But the number of foreign students has fallen sharply since new visa restrictions on bringing dependents were imposed in January. Competition from Canadian and Australian institutions is also increasing.

Pain is unevenly distributed. Ratings agency S&P Global Ratings expects the credit quality of most universities to remain solid, but margins are under severe pressure. The monitoring agency expects operating margins to average about 0.5% of operating expenses over the next two years, down from nearly 5% over the past three years.

The best locations are research-intensive institutions with well-known brands that are of great interest to international students. According to rating agency Moodys, educational institutions such as Oxford, Cambridge, and University College London relied on domestic undergraduate tuition for only about 5% of their total revenue in 2023.

The finances of lower-ranking universities, which mainly focus on domestic students, are relatively stable as they benefit from tuition increases and do not suffer much damage from the departure of international students. The most vulnerable institutions are lower-tier universities that rely on international students, especially those from countries such as Nigeria and India, which have been particularly affected by recent visa changes.

Struggling institutions are cutting jobs and considering mergers and partnerships. That may not be enough to prevent disaster. Universities that had bet their futures on recruiting more and more international students are finding that their bet is rapidly going bad.

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