9th Report - Higher Education and Funding: Threat of Insolvency and International Students

There are widespread economic, social and research benefits from the higher education sector. These benefits are particularly important in less prosperous areas. While Baroness Smith is right to highlight the economic benefits of larger institutions, we found that even smaller universities can have an immense impact, especially when located in smaller towns, and can be the largest employers in their area. The Government must take full account of the essential economic anchor role of universities when formulating policies and responding to financial difficulties in the higher education sector. (Conclusion, Paragraph 30) Helping Higher Education institutions avoid insolvency

The Office for Students’ TRAC data shows that Government research spending is not funding 80% of full economic costs of research in the way it should. The UKRI is undertaking research into why this is the case. We welcome the Government’s increase in research and development funding over this Parliament, and commitment to retaining the real-terms value of QR-funding. The Department for Science, Innovation and Technology has also announced reforms to how research and development funding will be allocated into three buckets: of curiosity-driven foundational research; strategic government and societal priorities; and innovative companies. (Conclusion, Paragraph 50)

The Government should confirm its commitment to meet the 80% full economic costs of research, its timetable for when it expects to meet 80% full economic costs, and its assessment of the long-term sustainability of 109 this model given the reduction in cross-subsidy for home undergraduate students from other sources such as fee income from international students. (Recommendation, Paragraph 51)

The representative bodies of small institutions, such as Conservatoires UK and Independent Higher Education, have highlighted the high cost of Office for Students regulations for such providers. The Office for Students should review the costs of its regulation to ensure they are fair to institutions of all sizes. (Recommendation, Paragraph 56)

The Government should support universities to address the financial challenges caused by the requirement for some universities to offer membership of the Teachers’ Pension Scheme. The current situation is imposing a high cost on providers in the scheme, whilst incentivising them to outsource staffing to wholly owned subsidiary companies as a way to get round the requirement to enrol them in the TPS. (Conclusion, Paragraph 68)

The Government should explore the following options: • Both UCEA and UCU have asked HM Treasury to review the SCAPE discount rate, which was reduced at the last valuation and UCEA stated caused the increase in employer contributions. The previous valuation in 2023 was based on data from 2020. The valuation of 2027 should take account of these calls. • If contributions remain a burden the Government could consider providing financial support, as it has provided for state schools and FE colleges, and the Scottish Government has provided for Scottish universities. • The Government could prohibit the creation of wholly owned subsidiaries which are being used to avoid the requirement for TPS membership. (Recommendation, Paragraph 69)

The high levels of university borrowing and the covenants which are in force are adding to the financial pressures facing some providers in the higher education sector. This expansion followed the removal of borrowing controls in 2018 when the Office for Students was created. Increases in interest rates in the last few years have impacted negatively on the cost of loans originally taken out in the 2010s. (Conclusion, Paragraph 74)

The Government should outline the measures it and the Office for Students are taking to ensure the sustainability of higher education institutions’ borrowing, to work with creditors to ensure they recognise the benefit of avoiding an institution closing, and measures to support HE institutions that are in particular financial difficulty. This should include consideration of when tuition fee loans are paid to higher education providers, and 110 whether the Office for Students should have a role in agreeing high levels of borrowing, as occurred with its predecessor, the Higher Education Funding Council for England (HEFCE), and occurs in Scotland and Wales. (Recommendation, Paragraph 75)

We heard concerns that the quality of governance had contributed to HE institutions facing financial difficulties. There is a need to ensure governing bodies have the capabilities and culture to challenge effectively the assumptions of senior leadership in higher education institutions, including on finances, projections of student numbers, and plans for restructuring. (Conclusion, Paragraph 85)

The Office for Students should develop a governance improvement programme for higher education institutions to ensure that good practice is disseminated, benchmarking tools are available and direct support to strengthen governance is available to institutions when needed. (Recommendation, Paragraph 86)

As a first step to improve governance, the Government should work with the higher education sector to implement Sir Philip Augar’s proposal to defer some of the financial pay of senior leadership until their term of office is over, as has occurred in the financial services sector. We may also return to this subject later in the Parliament to ensure that the quality of governance is improving. (Recommendation, Paragraph 87)

We welcome the Government’s moves to introduce mandatory regulation of franchise providers with 300 or more students and the availability of better data. There remains a major risk for some HE institutions that have become heavily dependent on franchisees that their withdrawal from providing courses could have a shock effect on the institution’s finances. (Conclusion, Paragraph 92)

The Office for Students should therefore provide guidance to universities seeking to exit or significantly scale back franchising relationships. (Recommendation, Paragraph 93)

The Government has been welcoming of transnational education, but in such a tumultuous global situation establishing campuses abroad also carries financial risks. (Recommendation, Paragraph 94)

The Government should outline how it and the Office for Students are working with HE institutions and franchisees to monitor this situation and manage the potential impact of a franchisee becoming insolvent. It should also outline what increased measures are being taken to monitor the risks of transnational education on HE institutions. (Recommendation, Paragraph 95) 111

The higher education sector is under unprecedented financial pressure, with the Office for Students reporting that 45% of higher education providers could face a deficit in 2025–26 without mitigating action. We have heard that these financial pressures vary amongst different types of HE provider, but stem from the freezing of UK undergraduate tuition fees, for some institutions the lifting of the cap on student numbers, reductions in research and teaching grant funding, the impact of higher interest rates on the cost of borrowing, and recent changes in both international student numbers and countries of origins. Concerns were also raised about the quality of governance at some HE institutions, the impact of increases in national insurance employer contributions and Teachers Pension Scheme contributions, and regulatory costs. (Conclusion, Paragraph 102)

The Government states that the present £9,535 fees are only worth £5,920 in 2012/13 terms, a reduction of 38%. Future increases in line with inflation will not reverse that historic reduction. We also know that publicly funded teaching for undergraduate home students costs more to deliver than the income received by HE providers, leaving them reliant on cross- subsidies. This means some higher education providers will continue to struggle in the next few years. Independent HE and the British Universities Finance Directors Group both highlighted the vulnerability of smaller and specialist institutions that are heavily dependent on tuition fee income. (Conclusion, Paragraph 103)

We welcome the Government’s commitment to ensuring undergraduate tuition fees retain their real-term value by raising fees in line with forecast inflation. However, maintenance loans are tied to forecast inflation and in recent years forecast inflation has repeatedly been lower than actual inflation. The effect of this has been a major real-terms reduction in the value of maintenance loans which have been increased in line with those forecasts. (Conclusion, Paragraph 104)

As the Government is now intending also to link increases in the undergraduate tuition fee cap to forecast inflation, the Government should explain the mitigation it will put in place were the previous trend of substantial under-estimation of forecast inflation to be repeated. (Recommendation, Paragraph 105) 112 Support for Higher Education providers at risk of insolvency

We have heard an early warning system is needed to give better information about the risk of a higher education provider becoming insolvent. Currently there is no clearly understood protocol for how the Government might respond to a situation of a provider at risk of imminent insolvency, which is a very serious problem. (Conclusion, Paragraph 119)

An early warning protocol needs to be established with urgency. This follows calls for improved early warning from the Russell Group, the Institute of Physics and Aston University. A protocol would also address when the Government should intervene and ensure there is a clear process to manage the risk of institutional insolvency. Such a protocol would be triggered by the Office for Students categorising an institution as being at risk of insolvency. (Recommendation, Paragraph 120)

The protocol should include assessment of viability, quality of provision, size and scale and importance to the local community and economy, accompanied by a review of governance and greater financial reporting requirements. Costed plans would be required for protecting students, staff and the wider community in the event of insolvency. A decision could then be made on which of a range of options to implement, including • Restructuring, • Merger or inclusion in a multi-university organisation, • Taken over by another institution, • Direct financial support, or • Orderly exit. (Recommendation, Paragraph 121) When a Higher Education provider becomes insolvent

We have heard conflicting views about whether a higher education provider can continue to operate when insolvent. The Minister for Skills says that she thinks they can, arguing that institutions entering liquidation can carry on operating whilst being wound up. She stated that the threshold for government intervention in such a scenario would be very high. By contrast, the law firm Mills & Reeve LLP and sector stakeholders think an insolvent provider would, depending on their legal structure, potentially have to stop 113 trading and be liquidated immediately, which would have an immediate and devastating impact on students, who would not be able to complete their course. (Conclusion, Paragraph 133)

Government should legislate to clarify the situation so that higher education providers that become insolvent can continue to operate and avoid a disorderly exit. Its response should also clarify the criteria for the threshold for Government intervention for each of the range of different types of entity that comprise higher education institutions. (Recommendation, Paragraph 134)

We have heard differing views on whether a special regime would be beneficial to protect the interests of students, staff and other stakeholders, or whether creating a regime would distract from efforts to stave off insolvency. While we respect the concerns voiced by university organisations, the negative impact of a disorderly exit is too great to be left unchecked. (Conclusion, Paragraph 145)

A special regime, building on and learning lessons from the Further Education regime, could ensure an orderly exit. This would include ensuring teach-out processes for current students, protecting the sufficiency of sector-critical courses and allowing for mitigations to avoid geographical cold-spots. (Recommendation, Paragraph 146)

Given concerns from Universities UK that a special regime could lead the ONS to reclassify higher education providers as public sector bodies, as has happened with FE colleges, the Government should ask the ONS to lay out clear criteria for when such a reclassification would take place which can be kept in mind when designing the special regime. (Recommendation, Paragraph 147)

The current Student Protection Plans are inadequate. They would not provide sufficient protection were a large provider to become insolvent, something acknowledged by the Office for Students. Moreover, the plans do not cover the interests of staff, the impact on research or harm insolvency would do to the local economy and community. We therefore welcome the Office for Students’ openness to reform in this area, but believe those changes need to be more far-reaching, to ensure robust protection when a higher education provider is at risk of insolvency and ceasing to operate, and to include the interests of staff, the impact on research, and the harm that insolvency would do to the local economy and community. (Conclusion, Paragraph 156)

The Office for Students should apply its strengthened student protection regulation to all higher education providers, not just new providers. The plans proposed above should be the basis for protecting students, staff, and the wider local economy and community. (Recommendation, Paragraph 157) 114

Protection for students should ensure a teach-out process and options for transfer to other suitable higher education providers, and ensuring international students can continue their studies until completion. Each institution should be required to undertake an assessment and develop a plan for the teach out and transfer of their undergraduate, post-graduate and research students in the event of insolvency. (Recommendation, Paragraph 158)

Protection for staff should include a clear and orderly process of insolvency. There should be consideration of how to ensure continuity of research and protecting pension schemes against the financial shock. (Recommendation, Paragraph 159)

The Government should develop a strategic plan to avoid cold-spots and protect the local economy and public services in the event of an HE institution becoming insolvent, in order to protect the wider community. (Recommendation, Paragraph 160) Alternatives to insolvency

There was strong support amongst our evidence from HE providers for the positive benefits of sharing services between higher education providers, but we have heard that a significant barrier to this is VAT on shared services for HE. Its removal would increase efficiency and enhance collaboration between providers. It is disappointing that HM Treasury was unable to provide us with details of the VAT receipts it receives from higher education providers that currently are sharing services and not benefiting from the Cost Sharing Group VAT exemption. (Conclusion, Paragraph 175)

Given the considerable financial pressures on higher education institutions and the potential cost saving benefits of sharing services, we recommend that the Department for Education works with the Treasury and the higher education sector to gather the necessary data to progress an exploration of removing VAT on shared services. (Recommendation, Paragraph 176)

Evidence from the higher education sector supported greater collaboration between providers. We welcome the CMA’s recent update about when collaboration with other higher education providers is permissible. We will monitor any future developments in this space, especially were a situation to arise in which competition law proved a barrier to necessary and desirable collaboration between higher education providers. (Conclusion, Paragraph 181)

The Government and the CMA should continue to monitor the impact of competition law on the higher education sector, including whether it is deterring necessary conversations and moves towards closer 115 collaboration and mergers. The Government should also launch a consultation looking at whether any changes needed to be made to the operation of competition law in the higher education sector in the future. (Recommendation, Paragraph 182)

There are risks of cold-spots developing in geographical areas, heightened because more students are living at home whilst studying; in specific subjects such as music, physics, chemistry and modern languages; and where courses feed into local provision of important professions, such as nursing courses that support local pipelines into nursing. (Conclusion, Paragraph 199)

There should be greater coordination between local higher education providers, with further education colleges (many of which offer higher education courses) and with metro-mayors and combined authorities. Following the proposal of Lincoln University, there could be a role for regional skills bodies and devolved and local authorities in co-designing and commissioning higher education provision to meet the need for skills in the public and private sectors in that region. (Recommendation, Paragraph 200)

There should be greater coordination by the Office for Students and UKRI with the Department for Education, the Department for Science, Innovation and Technology and other relevant Government departments and agencies, as called for by the Russell Group. This would build on the recent mapping of cold-spots published by HESA. This could support greater collaboration between higher education providers once the CMA has clarified the law. (Recommendation, Paragraph 201)

The Government’s reforms to the Strategic Priorities Grant should consider whether to reintroduce the Strategically Important and Vulnerable Subjects programme that existed in the 1990s and 2000s and as proposed by the Royal Astronomical Society and Universities UK. Funding through the grant could cover both high-cost subjects (which the Government has said it wants to prioritise) and strategically important subjects not currently eligible for teaching grants (e.g. modern languages). The diversity of the higher education sector should be reflected by targeting such grants at areas or types of institution where cold-spots are at risk of developing, to ensure the provision of high-cost and strategically important subjects across the country and at institutions with varying entry standards. (Recommendation, Paragraph 202) 116 International Students: Impact of the Government’s reforms

The financial pressures on the higher education sector have driven the sector’s reliance on international students. This reliance has been directly driven by decisions of the Government. Immigration policies have a very significant effect on the higher education sector, and the Government must consider the consequences of its decisions in a joined-up way. If the aim is to have fewer international students, the Government must set out how it will support the financial sustainability of higher education institutions. (Conclusion, Paragraph 213)

The Home Office plays a significant, even preeminent, role in the financial health of the higher education sector. This is because international students are heavily affected by changes in immigration rules. This influence came in for some strong criticism in written evidence, and we heard differing views on whether to include international students in the net migration target. We regret that the Home Office was not a co-owner of the Government’s recently published International Education Strategy, though the strategy did include a focus on sustainable international recruitment that linked to the approach pursued in the Immigration White Paper. The lack of a direct role for the Home Office reflects a wider issue of coordination between the Office for Students, UKRI, Skills England, and the different government departments that directly and indirectly affect higher education. (Conclusion, Paragraph 223)

The Home Office should be made a co-owner of the International Education Strategy and commit to adhering to it in future immigration policy that affects international students. This should be alongside stronger coordination across the Government on higher education policy. (Recommendation, Paragraph 224)

We heard concerns about changes to the Graduate Visa under the previous and present governments. The graduate visa was one factor in the increase in international student numbers after 2021, and the changes since 2023 have been a factor in the subsequent reduction in the number of international students in the last three years. These changes also mean the UK compares unfavourably to major competitor markets in Australia and Canada. (Conclusion, Paragraph 230)

The Government should carefully monitor the impact of its graduate visa changes, and publish an independent evaluation of the changes one year after the reduction to 18 months for undergraduate and taught postgraduate students takes effect. (Recommendation, Paragraph 231) 117

We understand the Government’s wish to crackdown on abuse of the student visa system. The Government has decided to pursue this objective through reforming the BCA requirements. We have heard concerns from higher education providers and stakeholders about the implementation of the tougher BCA requirements, particularly how they would be measured and publicised. We heard that the international student market is changing with demand from China expected to decline. This makes it vital that HE institutions can diversify the countries which they recruit from. However, the BCA reforms appear to be deterring HE institutions from diversifying where they recruit from, despite this being an objective supported by the Government’s International Education Strategy. (Conclusion, Paragraph 244)

The Government should address the concerns raised by higher education providers about how they will monitor the tougher BCA targets for institutions. It should commit to using real-time data, avoid using unreliable international ranking metrics, consider phasing in the changes, and ensuring the metrics do not treat smaller providers unfairly. (Recommendation, Paragraph 245)

The Government response should also outline how its approach on BCA will help rather than harm attempts to diversify where higher education providers recruit international students from. (Recommendation, Paragraph 246)

We join with the higher education sector in welcoming that the UK will be associating with the Erasmus+ programme from 2027. (Conclusion, Paragraph 249)

In its response to this report the Government should publish its impact assessment of association with the Erasmus+ programme and support higher education providers in maximising the benefits of our association. (Recommendation, Paragraph 250)

The Government should clarify whether it intends to continue with the Turing Scheme. It should also outline what lessons it has taken from the Turing Scheme, for instance around provision for students from disadvantaged backgrounds, the geographical range of institutions linked to, and how beneficial aspects will be built into association with Erasmus+. (Recommendation, Paragraph 251) 118 The International Student Levy and Maintenance Grants

We heard strong opposition from the higher education sector to the International Student Levy. They are concerned they may not be able to pass on the extra cost to students through higher fees and will struggle to absorb the additional financial cost given the sector’s wider financial difficulties. We were told by the Chair of the Migration Advisory Committee that he expects in the long run the cost will be passed on to international students. The Government told us that the funding of maintenance grants through the levy would tangibly demonstrate the benefits that international students bring to the UK higher education system, particularly through benefiting disadvantaged students in England. (Conclusion, Paragraph 275)

The Government has decided to proceed with the international student levy, despite the evidence which we received expressing concerns about its impact on the higher education sector. We urge the Government to engage with and take on board the concerns of the higher education sector about the risks of the levy given the financial precariousness of different providers. (Recommendation, Paragraph 276)

In particular, we have heard there are concerns that the levy will disproportionately affect institutions with high numbers of local students and students from disadvantaged backgrounds, the very same students who the Government intends will benefit from maintenance grants. In its response, the Government needs to provide a more detailed analysis than the Impact Analysis published at the November 2025 Budget. Specifically, it should provide further details of the impact on different types of providers, and the wider ramification on the local economy and community where those providers are located. (Recommendation, Paragraph 277)

In its Immigration White Paper the Government said the levy would be reinvested in the higher education and skills system. It should confirm whether it expects revenue from the levy to pay for other areas of the skills system in addition to higher education maintenance grants. (Recommendation, Paragraph 278)

During our visit to Warwick University we heard that the increased graduate unemployment in China and a currency shock in Nigeria have made students from those countries more price sensitive. There is also increasing competition with a growing number of countries seeking to attract international students. Therefore, the Government should also research and publish how price elasticity differs among students by countries of origins. (Recommendation, Paragraph 279) 119

We were told by Universities UK that were HE institutions able to charge higher fees they would do so. However, we also appreciate there are considerable differences in the fees charged to international students between providers. In addition, a flat-rate £925 per student levy with an exemption for the first 220 international students per year differs from the original Government proposal. Therefore, the higher education sector should clarify whether they agree with the Government’s own analysis of price elasticities by different types of HE institutions, and if not, offer their own analysis. (Recommendation, Paragraph 280)

The Government should establish monitoring and evaluation of the impact of the levy, which could be undertaken by the Office for Students, in terms of the impact on the financial sustainability of HE institutions. It should also evaluate the impact on international and domestic students and the wider local economy and community. This should be published each year. (Recommendation, Paragraph 281)

We heard support for reinstating maintenance grants and calls for better maintenance provision, given that the value of maintenance loans have fallen in real terms in recent years. (Conclusion, Paragraph 282)

We welcome the new maintenance grants as part of support for UK students. The Committee may well examine student funding as part of wider work into student wellbeing later in this Parliament. (Recommendation, Paragraph 283)

In its response to this report, the Government should clarify how much it anticipates it will spend on maintenance grants in 2028–29 and 2029–30 (as the Budget 2025 documents were ambiguous), the rationale for the different subjects that could be eligible, and how the grant will operate alongside maintenance loans and the forthcoming Lifelong Learning Entitlement. (Recommendation, Paragraph 284) 120