Frozen out – How English Higher Education has become a fragile sector

By Richard Murphy and Gill Wyness

Of all the priorities the incoming government may have on 5^th July, England’s higher education sector is likely to be low on the list. But this may be short sighted – our once world leading HE system has become increasingly fragile over the last decade, with both students and universities suffering from real financial hardship. This is in stark contrast to 2012 where the controversial tripling of tuition fees (to £9,000 per year) put universities in their strongest financial position in decades, and the income-contingent loan system meant students from any income background could attend university. So what has happened?

Myself and colleagues evaluated the series of reforms which took us from zero tuition fees to the highest average tuition fees in the world by 2012.  (“The end of free college in England”). We evaluated these reforms in terms of: enrolments, equity of access and funding per student. We showed that enrolments had held up in the face of the significant fee increase, and the large participation gap that existed under free tuition marginally decreased, and the funding per head reached a 20 year high. The success of the system (by these measures at least) came down to i) the higher tuition fees injecting more cash into the system and allowing universities to expand, and ii) the well-designed income contingent loans system, which ensured that no student had to pay upfront fees, and had enough money to live on. The reformed system of 2012 protected against key market failures – credit constraints, risk and uncertainty and debt aversion – an economists’ dream.

So where did it all go wrong?

In short, with the governments’ decision not to index-link tuition fees and maintenance loans (along with the removal of maintenance grants). The tuition fee cap has only been allowed to increase once since 2012,  by £250 . Tuition fees are now worth around 20% less than they were in 2012 (Ogden and Waltman, 2023). This is disastrous for universities, which rely on fees as a key component of their income.  Things have been tough for students too – maintenance loans have increased over time, but have not kept up with the UK’s high rate of inflation over the last few years.

In the light of these issues, my co-author Richard Murphy and I decided to revisit today’s system, in terms of our three key measures of success – enrolments, equity of access and university funding.

Enrolments have continued to grow

For our first measure of success is easy to measure – have student numbers continued to grow since 2012? Here, there is good news. As figure 1 shows, enrolments have continued to increase at a steady pace since the 1990s, with a COVID-19 bump in 2020, due to more students receiving their required grades.

Figure 1: Student enrolments: number of full-time equivalent undergraduate students at UK HEIs

Notes: series break in 2000 due to change in sources. Source: 1994-2002, figures compiled by V. Carpentier. 2001-2021, Higher Education Information Database for Institutions (HEIDI)

Equity under threat as the value of maintenance loans decline

But have these increases in enrolment come from all sectors of society? Figure 2 shows the gap in participation between students from high and low SES backgrounds, Since 2005 there has been a slow general closing of the SES gap in enrolments between high and low SES students which has continued post 2012 (though it’s worth pointing out that the POLAR4 measure of SES used here has been criticised in the past – other measures are tricky to access but may show a different story). The exceptions are the 2011 and 2020/21 blips. The former likely caused by fewer SES taking gap years in order to enter under the lower fee scheme, and the latter the COVID-19 bump.

This general reduction in inequality is potentially surprising, given the deterioration in financial conditions experienced by lower income groups in recent years. Figure 3 shows the amount of money students from different income background have to live on while studying during each of the reforms.  Since 2012, there has been little improvement in liquidity. An increase of about £1,000 per year in real terms for the poorest students, between 2012 and 2016 (as well as a gradual increase between 2016-2020), has now been eroded entirely by inflation, so that the maximum maintenance loan is now worth less, in real terms, than it did in 2016.

Figure 2: Higher education enrolment gap, POLAR 4 measure of deprivation

Source: UCAS End of cycle report, 2023

 

Figure 3: Net liquidity (grants+maintenance loans-upfront fees) by parental income for different fee regimes

Source: Authors’ calculations using data from Student Loans Company, 1991–2024. Figures expressed as amounts per year.

Funding per head hit hard as tuition fees frozen

Before 2012, a significant proportion of university funding came through the government teaching grant, with a smaller proportion from tuition fees. The 2012 reforms were designed in part to shift the burden of payment towards graduates. This was seen as preferable to relying on government to fund the system, which is invariably low-priority in times of austerity (Murphy et al, 2022).

Figure 4 plots university funding per full-time equivalent student, both for ‘domestic’ undergraduate students and all student types –postgraduate, undergraduate, UK, EU and overseas students (who typically pay higher fees).  The funding per head for domestic undergraduates is closely tied with the tuition fee increases.  Real funding per head spiked in 2012 then stabilised. But in recent years, funding per head has declined and now stands at the 2011 level.

By contrast, overall funding from all student types has not suffered the same decline. This reflects universities attempts to protect their balance sheets with income from students whose fees are unregulated – predominantly international students. Analysis from the IFS (Drayton et al, 2023) reports that in the 2021–22 financial year, tuition fees from non-UK students accounted for 42% of higher education course fees and 21% of all income for universities in England. Any reductions in the numbers of international students will translate into lower funding per head of domestic students.

Figure 4: Average funding per full-time equivalent student

Sources: Funding from all sources – statistics for 2000–2002 are taken from Carpentier (2004) and statistics for 2002–2021 taken from Higher Education Information Database for Institutions. These figures are not available for 2015,2016,2017.  FTE enrolments used in the computation contain all student types (full-time, part-time, postgraduate, undergraduate, UK, EU, overseas); funding per head is for all students and comprises teaching grants and tuition fee income (the latter for all student types listed above). Funding from domestic students taken from IFS (2023)– total up-front public resources provided for teaching. This is effectively tuition fees for domestic students (minus any fee discounts) plus teaching grants. Figures expressed as funding per student per year. All figures expressed in constant 2023 pounds sterling.

An increasingly fragile sector

The governments decision to freeze domestic tuition fees – apart from the 2017 increase of £250 – as well as its failure to protect the real-term value of maintenance loans is perhaps not surprising. Tuition fees (and student loans) are perennially unpopular with voters (though less so when they are shown how much fee abolition would cost the taxpayer – as a recent Public First report showed) and no government wishes to risk the wrath of the middle-classes by putting them up during a cost of living crisis.  But freezing university and students’ incomes is a policy decision as much as increasing them is, and it comes at a cost.

So far, the sector seems to have coped. Enrolments have held up, access to HE has continued to gradually improve , and university funding per head is still above 2012 levels.  However, this masks an increasingly worrying picture. Funding for domestic students is in serious decline, meaning that universities are more and more reliant on international students to keep themselves afloat. Whether this is likely to be sustainable for much longer is debatable, as the impact of student visa restrictions is felt. Meanwhile, students themselves are increasingly squeezed by falls in their income from maintenance loans.

So what can be done? The obvious solution would be to immediately reverse the erosion of tuition fees and maintenance loans in real terms (and to index link fees and finance going forward). This would amount to an increase of around £2000 per year in tuition fees for home students (Ogden and Waltmann, 2023) – likely to be extremely politically unpalatable for a new government and its already cash-strapped electorate. The major party manifestos have offered little detail on how they might tackle the crisis. The Conservatives plan to keep the 2022 finance regime in place, the Liberal Democrats propose to hold a review and Labour acknowledge the issues stating ‘The current higher education funding settlement does not work for the taxpayer, universities, staff, or students,’ suggesting a review is on the cards.

But action is urgently needed to prevent universities – especially those with less access to lucrative foreign students – from going under. Given the strength of our university sector, let’s hope the new government acts before it’s too late.