The regulator is calling on providers in England to “look carefully” at the credibility of their forecasts and make changes to funding models after the review found a decline in financial performance in 2022-23.
It painted a picture of declining surplus levels, cash flow and net liquidity, with more providers expected to fall into deficits in coming years.
No growth across the sector could leave nearly two-thirds of institutions in deficit by 2026-27, with 40% facing low liquidity at year end, it warned.
“Many universities continue to manage their finances well. Many have built a strong asset base to allow them to weather financial storms. But the picture across the sector is becoming increasingly challenging,” said Susan Lapworth, chief executive of the OfS.
“Financial performance and strength vary significantly for different institutions and our analysis shows that an increasing number will need to make significant changes to their funding model in the near future to avoid facing a material risk of closure.”
The OfS added that while net liquidity has fallen, there is “evidence of the sector adjusting to protect its cash flow in the face of financial challenges”.
It highlighted that although an improved outlook is predicted by 2026-2027, much of the projected additional income comes from anticipated growth in both domestic and international students.
The OfS warned of “uncertainty” about the ability to recruit significant numbers of extra students resulting in “significant risk that the actual financial challenges facing the sector in the short, medium and long term are greater than providers are forecasting”.
The report is therefore “a signal to all institutions to re-test their assumptions about increases in UK and international students”.
“The numbers reported to us for the sector as a whole are just not credible,” said Lapworth.
“Some institutions will certainly be able to grow. But in a competitive market – and with some evidence that applicant numbers are falling – others will struggle to expand.”
“The value of domestic tuition fees is now 25% lower than it was in 2015 when adjusted for inflation.”
In response to its analysis, the OfS is calling on all universities and other higher education providers to identify the steps they will take if future growth is not achieved.
The worst case scenario outlined in the report is a significant reduction in international student numbers and no cost cutting activity.
Such a scenario would see over 80% of institutions in deficit and nearly three-quarters facing low levels of liquidity, warned Lapworth.
“That is why universities should redouble their efforts to avoid optimism bias and identify now the actions they will take to ensure they remain on a sound financial footing.”
The report highlights five key risks affecting the sector:
- Continuing decline in the real-terms value of income from UK undergraduates combined with inflationary and economic pressures on operating costs
- A recent apparent reduction in applications from UK and international students after years of strong growth, especially from international students
- A higher education financial model that has become reliant on fee income from international students, with a particular vulnerability where recruitment is predominantly from a single country
- The affordability of necessary estates maintenance and development and the significant cost of investment needed to reduce carbon emissions as part of providers’ commitments to achieve net zero
- Cost of living difficulties for students and staff, which challenge both student recruitment and the support needed by students during their time in higher education.
Jo Johnson, FutureLearn chair, described the report as “very worrying indeed”.
The former universities minister puts the state of the sector partly down to continued tuition fee freezes, and is therefore calling for on government to allow domestic fees to rise with inflation.
“The value of domestic tuition fees is now 25% lower than it was in 2015 when adjusted for inflation,” said Jo Johnson, speaking on Radio 4.
“It’s a very bleak outlook and of course it comes at a time when the government is considering steps that might significantly worsen this outlook if they take steps to reduce the ability of international students to stay on for a short period of time after they study to work in the UK economy.”
In the same week as the regulator’s report, the Migration Advisory Committee published the findings of its review into the UK Graduate Route. The Committee was unequivocally in favour of the route in its findings, and Johnson said that it’s “critical” the government takes note.
“If we see the kinds of reduction in the international student numbers that we are presently seeing we will tip our institutions over the edge. The government needs to take stock of the damage this is going to do to core government objectives.”
Johnson highlighted the wider benefit of international students, using the case of Teesside University, where each intake of international students bring £240 million of value to the local economy.
Towns such as Darlington, Stockport and Middlesborough significantly benefit in this way, he pointed out, and would be “hammered” if international students stop coming to the UK.