UK universities are caught in costs and revenue trap

Financial pressures are forcing the University of Nottingham to make what it describes as the “biggest changes in its 145-year history in planned cuts that include switching from five faculties to three colleges and are expected to affect 500 jobs across the university.

It has also axed full degree programmes in modern languages and music. And traditional one to one personal tutoring will be replaced by “structured, team-based support”.

The cuts are the latest symptom of mounting financial pressures on UK universities caught in a triple lock of rising employer costs, tighter restrictions on recruiting international students, which are an important source of revenue, and a decreasing real terms share of funding being borne by government, which now has sunk to 16%.

The falling government share has been caused by years of a freeze on the tuition fee rate, causing shrinkage in real term value, which has only recently been stabilised by a temporary inflation linked rise.

Nottingham stress that their plan, Future Nottingham, also includes improvements. Modern languages modules, for instance, will be offered through a new university-wide language centre that will allow students on most degree programmes to take a module in a modern language as part of their degree.

But in a press statement issued on 5 October, the university recognised that the cuts would take a heavy toll but financial pressures made them inevitable.

“We do not underestimate what this means for many of our staff and students. None of these decisions have been taken lightly, but the underlying challenges facing the university have not changed.

“We are still not generating enough from our day-to-day activities to invest in our future, nor have the wider pressures facing higher education abated. Student recruitment remains highly competitive, and future financial pressures such as inflation and rising costs continue to rise.

“Without further action, our longer-term position remains unsustainable, and that is why Future Nottingham remains so important.”

One of many facing cuts

Nottingham is just one of many universities that have announced cuts in recent months. On 1 October Sunderland University announced it is aiming to make £40m cuts within a year.

Sunderland has been hit in particular by the announcement in March of the suspension of student visas to people from Sudan, Myanmar, Afghanistan and Cameroon. Sunderland has been an active recruiter of students from Myanmar but had to withdraw offers to 69 students after the rule change, the BBC reported.

Other universities reported by the Universities College Union to be affected by cuts include the universities of Wolverhampton, Bradford, Chester, Chichester, Exeter, Durham, Sheffield, and Sussex, and Bournemouth University, Leicester University, Liverpool Hope University, the London School of Economics and Political Sciences (LSE).

According to Universities UK surging inflation, employer National Insurance contributions, and building/staff maintenance costs have pushed nearly half of English higher education providers into financial deficit.

Government funding model questioned

As the financial pressure on universities has intensified, the government is coming under increasing pressure to mend its seemingly broken funding model.

New analysis for Universities UK or UUK shows the total funding that universities in England receive from fees and government grants to teach each full-time student has dropped by 23% in just four years since 2020 and 2021, from £12,220 to £9,450, as the frozen fee cap lost value to high inflation.

Universities are educating more people than ever, but with less to spend on each of them.

The UUK analysis, which is provided by London Economics, finds that the government’s contribution to funding English undergraduate students studying in England has fallen in real terms from £8.9 billion in 2012 and 2013 to £3.3 billion in 2024-25.

Universities are relying on student fees to fund 84% of the cost of their degrees, up from 52% in 2012 to 2013.

As a share of the economy, the public’s investment in students’ education and support has fallen by more than two-thirds, from 0.42% of GDP in 2012–13 to 0.12% in 2024 and 2025.

Vivienne Stern MBE, chief executive of Universities UK said: “The balance is now badly out of whack. We need a reset, which recognises that we all benefit when a student studies for a degree.”

The new data shows that the government’s share of the cost of educating and supporting English students has dropped from 48% to 16% in over a decade, leaving students and graduates to cover 84%.

For every full-time student, the amount that the government expects to contribute to teaching and maintenance has fallen by 71% in real terms, from £8,840 in 2012-13 to £2,560 in 2024-25.

Over the same period, the corresponding amount that students and graduates are expected to contribute for teaching and maintenance has risen by 51% from £9,160 to £13,800.

MPs recommend 50:50 split

It comes as MPs on the Treasury Select Committee recommend that “in the long term, the government should return the balance between the individual and the state to a 50:50 split”.

Stern said the analysis shows that, over time, successive governments have been shifting more and more of the cost of getting a degree onto graduates.

“When the fee system was introduced, it was designed to be a co-payment model. Not 100% state-funded like schools, not 100% privately funded.”

She said the Treasury makes a profit on investing in graduates because of the higher tax and national insurance contributions they make, and society benefits from graduates staffing public services and driving economic growth.

Many UK universities rely on the higher fees they can charge international students to supplement their revenue from domestic student fees.

Stern said: “Government research published last week shows that English universities make a loss when they teach UK students, for almost every subject. In all four nations of the UK, we need a new long-term plan for higher education, and a sustainable basis for funding the high-quality education this country is famous for.”

Maike Halterback, partner at London Economics, said the analysis shows that both total teaching and maintenance funding per student have declined over time, as have the government contribution.

“In an increasingly constrained fiscal and wider economic environment, there are some very difficult choices ahead.”

US-UK analysis highlights UK trap

A new Policy Note from the Higher Education Policy Institute or HEPI adds further fuel to the universities’ beef with the government.

It argues that English higher education is suffering from being funded like American private higher education, with little direct public funding, but governed like American public higher education, with the price set externally.

This means that English higher education institutions are caught in a trap: they are heavily dependent on fees, meaning any drop in demand hits them immediately, but they are unable to set their own price and so have limited room for manoeuvre.

The policy note, Risk and Resilience: What UK higher education can learn from the United States (HEPI Policy Note 76), was written by Dan Greenstein, chief of industry Transformation at Ellucian, a leading higher education technology solutions provider (which sponsored the new HEPI Policy note).

But he is also a former chancellor of Pennsylvania's State System of Higher Education and former vice provost for academic planning, programmes and coordination at the University of California, as well as previously a lecturer in history at the University of Glasgow, Scotland.

Greenstein offers seven lessons for the UK from more than a decade of US experience.

These include that “funding levels do not predict distress, but funding design does”, for instance, whether public support is indexed to inflation and whether institutions can raise their prices.

Sector averages hide the position of individual institutions – and even an institution’s own headline numbers can hide its true financial condition, he warns.

“One revenue line alone, international students, is currently holding the sector up,” he says. But institutions “rarely fail from just one problem: They fail when different problems drive one another.”

He said from 2028/29, when fee increases will come to depend on quality, retention will “stop being an access measure and start driving revenue”.

“Recovery has to come from revenues – austerity can bolster efficiency but cannot deliver growth. Shared services save money but only those affecting student-facing and instructional services can change an institution's direction by driving revenue,” he concludes.

Ellucian Senior Vice-President & Head of Region, Europe, Matt Seales, says the evidence from the United States demonstrates that institutional decline most often emerges through a series of interconnected signals: changes in recruitment patterns; weaker retention; declining net revenue; pressure on cash generation; and reduced capacity to invest in the student experience.

“By the time these indicators appear in annual accounts, the underlying challenges may already be deeply embedded.”

’Trajectory matters more than shapshot’

“The paper’s most important conclusion is that trajectory matters more than snapshot measures, and that institutions succeed when they can identify changing patterns early and act decisively before financial pressure becomes structural decline.”

In his paper, Greenstein said every American case of an institution or system pulling out of a deteriorating trajectory involved it acting on revenue, not costs alone.

“Cost reduction does not touch what is driving the decline. An institution that runs its savings programme perfectly while its recruitment keeps falling has not changed its trajectory; it has made its contraction more efficient…”

He says England also has no authority able to act across institutions, and competition law constrains UK collaboration where it does not constrain American systems.

“And England's position has no American parallel: its institutions are funded like American private universities, with student fees producing more than half of the sector’s income, but priced like American public ones, with no control over price and no block-grant appropriation to absorb a shock. They carry private-sector exposure at public-sector speed.”

Added constraints in Scotland, Northern Ireland

Greenstein notes extra challenges faced by institutions in Scotland – where currently Edinburgh University staff are striking over a feared loss of 1,880 jobs in plans for £140m cuts – and Northern Ireland.

“The worst combination in the data is a capped price alongside a capped intake, because it offers no offset at all, and it is worse than a low appropriation that at least moves with costs.

“Scottish and Northern Irish universities, whose appropriations are not indexed and whose fees and student numbers are both controlled, hold neither lever.”

Nick Hillman OBE, the Chief Executive of HEPI, said people often talk about the Americanisation of UK higher education, but in many respects, the position of institutions in the UK is worse.

“Nominally autonomous, they are remarkably constrained in how they can respond to the crisis they find themselves in.

“This situation forces the system as a whole to accept managed decline while pushing individual institutions closer to the edge.

“Higher education institutions in the United States have faced similar challenges to those now disrupting providers across the UK. We can learn from that American experience, both on what to do and what not to do.

“If there is one way to sum up a better approach, I’d be tempted to start with the old saying ‘it’s the revenue, stupid’.”