Growing risks from an over-reliance on international students


Growing risks from an over-reliance on international students

The British HE sector is attracting international students and UK universities are home to around 700 000 international students. International students contribute to the UK economy in many ways and they are also financially invaluable for the whole university sector. Is the dependency already too strong?

Clear warnings expressed

The independent higher education regulatory body for England, Office for Students OfS, reports annually on financial sustainability of the higher education sector in England. In May 2023, OfS reported that while university finances generally remain in good shape, significant variation remains in the performance of higher education providers and there are growing risks from an over-reliance on international students and inflationary pressures. The analysis is based on data from the annual financial return of 2021-2022 and five-year forecasts from 2023-2027.

OfS found that the sector’s financial performance shows resilience, with income and expenditure surplus significantly better in 2021-2022 than had been forecast. According to OfS, many universities and colleges are also expecting their financial performance to improve. The sector is expecting to report growth in income across the next three years, rising from £40.8 billion reported in 2021-2022 to a forecast £50.1 billion in 2025-2026. 

In 2021-2022 total higher education course fees and education contracts were reported at £22.5 billion, an increase of 8.8 per cent compared with 2020-21 (£20.6 billion). Fee income is forecast to increase to £29.3 billion by 2025-2026, with a 17.5 per cent forecast rise in student numbers between 2021-2022 and 2025-2026 across all levels of study. Total overseas tuition fee income was reported at £7.8 billion in 2021-2022, an increase of 25 per cent compared with 2020-2021 (£6.3 billion). At an aggregate level, overseas fee income as a proportion of total income is forecast to increase from 19.3 per cent in 2021-2022 to 24.0 per cent in 2025-2026.

Despite of universities’ positive forecasts, Office for Students warns that for some higher education providers, there are increasing risks to financial sustainability in the long-term, particularly if multiple risks materialise at the same time. Some universities may have become too reliant on fee income from international students. As result of their findings in May 2023, OfS wrote to 23 higher education providers with high levels of recruitment of students from China, wanting to ensure they have contingency plans in case there is a sudden drop in income from overseas students.

Challenging financial outlook

The Universities UK (UUK), which represents 140 higher education providers in the UK, commissioned PwC to consider the current financial sustainability of the UK higher education sector (England, Scotland, Northern Ireland). PwC have analysed 84 universities’ (out of 255 higher education focused UK providers) financial predictions to assess their financial outlook in a range of different scenarios. 

According to PwC, UK universities enrolling 2.9 million students generated £116 billion in gross output for the economy and contributed £71 billion to GDP (England £59.3bn, Scotland £7.4bn, Wales £3.0bn and Northern Ireland £1.6bn) in 2021-2022. The PwC report, published in January 2024, foresees a challenging financial outlook for the sector especially because of the inflationary pressures affecting both teaching and research and the domestic student fee cap frozen until 2024-2025. Universities struggle with rising costs in materials, labour, energy, and borrowing. An increasing number of university estates require investment, with some no longer fit-for-purpose and many requiring retrofitting to meet net zero targets. Significant capital expenditure is required alongside rising maintenance costs and tightening operating margins. It is estimated that £6.6bn of investment is required to decarbonise Higher Education estates in the UK. Research income grew at c.2% from 2018-2019 to 2021-2022, and now sits at c.£7bn. Whilst there has been growth in income from both UK and international (excl. EU) sources, there has been a significant decline in EU funding (c.5%). Good news is that UK’s association to the Horizon Europe programme from the beginning of 2024 is expected to boost EU revenue. 

UUK sees that the universities are experiencing challenges with financial sustainability especially due to a decreased unit of funding for students from the UK (domestic students) in England, Wales, Scotland and Northern Ireland. In England, fees for domestic students have been capped at £9,250 since 2017 and are now worth only around £6,000 in 2012-2013 prices. According to UUK, this means funding per student is at its lowest level in over 25 years.  UUK’s analysis of the Higher Education Statistics Agency’s (HESA) finance data shows that the proportion of universities’ income from domestic student tuition fees fell to 28% in 2021-2022, down from 31% in 2016-2017. 

PwC report also shows that a significant proportion of universities are vulnerable to reductions in international student numbers, increased expenditure, and reduction in the growth rate of domestic undergraduate students, especially if all risks materialise at once.

What’s the solution?

UUK has reminded that students themselves are faced with increasing financial pressures as the student maintenance package in England is at its lowest value, in real terms, in seven years. In order to secure the number of domestic students, UUK suggests that the income contingent loan system should be retained, but reformed, to ensure future students have the same opportunities as those of the last decade and can access learning over their lifetimes. The Government has introduced the Lifelong Learning Entitlement (LLE), which is planned to transform the post-18 student finance system in England from 2027. It will create a single funding system to help people pay for college or university courses, and train, retrain and upskill flexibly over their working lives. The loan system is entitled for new and returning students. It will take time to understand whether the new system will encourage students to enter the HE system. 

UUK suggests that reliance on less stable sources of income must be reduced and the long-term decline in funding for teaching should be reversed through increased government grants and index linking the fee cap from 2025 onwards in England. Other proposals include increasing the proportion of cost recovery on publicly-funded research grants in all parts of the UK, addressing the decline in real-terms value of funding and scaling up funding in support of university contribution to innovation. UUK sees it important that universities continue their restructuring and transforming processes but also urges the Government to support the universities in adapting to the expected changes. 

The UK is the second most popular study destination in the world, hosting 9 per cent of the international students world wide. But the university sector’s optimism and increasing reliance on fees income from overseas students might not be sustainable in the long term for instance because the UK Government has tightened the immigration rules and the geopolitical climate is changing. For instance the Government’s decision to ban foreign students from bringing dependants with them for one-year taught master’s degree programmes is expected to reduce the number of international students. Prime Minister Sunak has also said that higher education expansion and the 50 per cent HE degree target has been ‘one of great mistakes of last 30 years’. PwC’s and OfS’s reports suggest universities to revise down their growth projections and develop contingency plans when it comes to international students. PwC also advises the sector to reduce costs while maintaining the quality of teaching and research. Still, PwC sees it inevitable that there is some loss of provision across the sector. 

Some of the risks OfS and PwC warned about have already materialised. The University World News reported on 12 January 2024 about Coventry University’s cash crisis. The university estimates that this financial year’s lower income is arising from the lower than expected student intakes, especially international ones. 

Text: Birgitta Vuorinen

Photo Birgitta Vuorinen: University College London

More information:

Office for Students' report on financial sustainability of HE providers in England 

PwC report on financial sustainability of the UK Higher education

UUK analysis of HESA finance data

Lifelong learning loan