University Financial Crisis: How Rising Deficits Threaten Student Experience

The higher education sector faces its gravest financial crisis in living memory with many universities now operating in a deficit.  The current predicament hasn’t emerged overnight, however, instead, it’s the result of multiple pressures that have been building for years, finally reaching a breaking point that threatens the sustainability of institutions that have educated students for centuries.

The foundation of the crisis lies in the declining real value of domestic student fees. When tuition fees were frozen at £9,250 in 2017, few anticipated that they would remain unchanged for so many years. Inflation has steadily eroded their purchasing power; for universities, this means that their primary revenue source has been shrinking year by year, while their costs have continued to rise.

In response to declining domestic fee values, universities have increasingly turned to international students to bridge this financial gap. This strategy undoubtedly worked during the years of strong international student growth, but the result is that it has created a dangerous dependency and over-reliance on international students. When geopolitical tensions, immigration policies changes, and the global competition for international students intensifies, these universities face immediate threats.

Essentially, universities banking their entire financial recovery on continued international student growth may be playing a risky game.

The powerhouse merger of two leading universities in London, St George’s and City, University of London, completed on 1 August 2024.

The transfer agreement formalising the merger plans was signed in February 2024 and submitted for regulatory approval, which was subsequently secured. The full integration, including combining branding, is expected to take several years.

The merger combines the specialities of St George’s, a specialist health university, and City University, creating City St George’s, University of London.

Following the merger, City St George’s, University of London, is now the largest supplier of London’s health workforce, making it a valued contributor and force for change in the healthcare industry.

Following the merger, City St George’s, University of London, is now the largest supplier of London’s health workforce, making it a valued contributor and force for change in the healthcare industry.

The failure of a university creates consequences that extend far beyond the institution itself. Students who have invested years of their lives and tens of thousands of pounds in their education face disruption that can affect their entire career trajectory.

The established regulatory framework recognises these broader impacts. The Office for Students has powers to issue Student Protection Directions to universities at risk of closure, requiring them to devise comprehensive plans for protecting student interests. These plans must include detailed arrangements for students to complete their studies elsewhere, systems for generating academic transcripts and certificates, and coordination with receiving institutions to ensure smooth transfers.

But regulatory powers can only do so much. Should a university be forced to close suddenly, the disruption to students and communities is severe regardless of regulatory intervention. The human cost of institutional failure surely provides the strongest argument for early intervention and proactive crisis management.

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Universities facing financial challenges have several potential pathways forward, but the viability of each option relies on acting in a timely manner; those institutions that wait until they’re on the brink of insolvency often find their choices increasingly limited.

Operational restructuring remains the preferred option for most institutions, involving fundamental changes to how universities deliver education and research. This might mean consolidating academic departments, streamlining course offerings, or implementing new models of educational delivery.

Strategic partnerships have become increasingly attractive as universities recognise the benefits of collaboration over competition. These partnerships can take many forms, from simple shared services arrangements to comprehensive academic collaborations. Some universities have found success through subject-specific partnerships, where institutions combine their expertise in particular disciplines to create stronger, more viable programmes.

The partnership model works particularly well when institutions have complementary strengths or serve different geographic markets. A university strong in science and engineering might partner with one that excels in humanities and social sciences, creating a more comprehensive offering for students while sharing the burden of operating costs.

Full institutional mergers represent the most dramatic partnership option but can create transformative results. The merged institution can eliminate duplicate functions, rationalise estate holdings, and create economies of scale that benefit all stakeholders. However, mergers require careful cultural integration and clear communication with stakeholders to succeed.

For some universities, external investment provides the most appropriate path forward. The higher education sector has attracted interest from various investors, from educational management companies to infrastructure funds interested in campus assets. These investors often bring professional management expertise and access to capital that can transform struggling institutions.

University leadership during financial crisis requires skills and experience that many senior teams have never needed to develop in their day-to-day working life. Academic leaders who have spent their careers focused on education and research suddenly find themselves managing complex financial restructuring, stakeholder negotiations, and regulatory compliance and face making decisions that require expertise in areas like insolvency law, merger negotiations, and crisis communications.

The governors who navigate these challenges successfully are those who recognise their limitations and ensure their universities have access to appropriate professional expertise. They understand that their role is not to become experts in university restructuring but to ensure their institutions make informed decisions based on the best available advice.

At Education Advisory we have a multi-disciplinary team of restructuring, turnaround, and M&A experts, all here to help you and your university through times of acute financial pressure. Whether you are exploring your options for refinancing, considering embarking on a restructuring project, or considering the possibility of a merger or acquisition, take the first step and speak to a member of the Education Advisory team.

As a school leader, you carry important legal duties under charity and company law. Failure to act in the best interests of the school, especially in times of distress, can result in personal liability or reputational damage.

Key responsibilities include:

• Ensuring the school remains solvent
• Seeking advice from professional advisors at the earliest signs of trouble
• Keeping full records of decisions and justifications