The quotation from Ernest Hemingway’s The Sun Also Rises is now very well-known: “How did you go bankrupt? Two ways. Gradually, then suddenly.” So the current financial woes have seemed for higher education.

The undergraduate fee fixed at £9,000 in 2012 and has been increased just once, to £9,250, in 2018. It was a gradually tightening economic belt around universities through a decade of low inflation. Cost pressures were made manageable by annual efficiency measures, accompanied by modest increases in home undergraduate student numbers and more ambitious international growth. And then, in 2022, following the pandemic and Russia’s invasion of Ukraine, the global economy experienced sudden high inflation. Geopolitics, energy price rises and economic difficulty put the finances of universities under huge strain. Even if inflation now abates, the dependence on international students which helped to balance the home fee is being attenuated by immigration policy. How did you go bankrupt? Gradually and then suddenly.

There is general agreement that university finances are unsustainable. The economic challenge is lucidly set out in Shitij Kapur’s Triangle of Sadness paper. The problems are more acute in some parts of the sector than others, and are a particular worry for universities with covenants on loan agreements taken out in more benign times. But there’s no agreement on what should be done.

There are two broadly competing responses. For some, and especially those associated with David Willetts’ 2012 funding reforms which produced the £9,000 fees, the solution is simple: that structure is robust, and the problem can be solved through inflationary increases in the current fee. For others, increasing the fee is not practical: levels of graduate indebtedness produced by the highest student fees in the world, and associated maintenance loans, mean that university funding needs a fundamental overhaul. Both perspectives accept that UK public finances are in a poor shape, and there are many other pressing demands for investment: the NHS, schools, early years, social care, social housing, railways, pot holes in roads and so on. The crisis in higher education finance has come at a time when universities have few advocates in Whitehall.

 

Each perspective has strong arguments. “Fee-increasers” are right that the most efficient way to get money into the sector would be to raise fees. The beauty in the design of the 2012 reforms was to create something akin to a graduate tax without the disadvantages of a graduate tax: money was not collected into general taxation, from which political decisions would be needed for its distribution, but through a loan system which preserved the link between student study choices and institutional funding. Student loan debt differed from credit card or mortgage debt, since it is collected as an income-contingent surcharge on earnings. Students could see that what they repaid was linked to the cost of their own education, and the public good of higher education was implicitly recognised in the amount of the overall student loan book remaining once unpaid portions of loans were written off after 30 years.

But even the most enthusiastic fee-increasers accept that some poor decisions, made for political reasons, have undermined the system. As a result of the Theresa May’s 2018 decision to raise the threshold at which graduates begin to repay loans, many do not reach the earnings threshold to begin to make payments. Treasury-imposed decisions in 2022 to extend the repayment period to 40 years and to reduce interest rates are expected to reduce the burden of student loans on the taxpayer. But they made a broadly progressive system highly regressive, and reduced the public cost of higher education below a level which recognises the social good of universities.

For the “system-reformers”, these changes point up deep flaws in the system. English students graduate with the highest debt in the world, yet graduate salaries flatlined as the UK economy weakened through austerity and, subsequently, Brexit.

The combination of fee-debt and maintenance-debt has produced such high levels of overall student indebtedness that there appears to be no public, or political, tolerance for higher fees. Moreover, an unintended consequence of the 2012 reforms has been to drive out diversity of provision. Full-time, often residential, three-year undergraduate provision has become yet more deeply established as the norm, driven by a funding regime in which it is difficult for students to borrow for other forms of provision (e.g. part-time). And the 2012 funding regime created longer-term problems for the relationship between teaching and research: in the early years, domestic and rising international fees cross-subsidised research so that the shortfall in government funding was obscured. More recent financial developments, together with the administrative changes following the 2017 Higher Education and Research Act, have driven wedges between the funding of teaching and of research.

But, again, even the most enthusiastic system-reformers accept that no overhaul of funding will produce significantly more money for higher education. Taking per-student funding back to 2012 real terms would cost in excess of £2.5bn a year. This means that, as ever in higher education economics, policy would be forced into painful choices. Ultimately, there are few who can pay for higher education: governments, private individuals, or some form of loan regime. There are no other options.

 

To add to the complexity, different universities have different priorities and concerns. For the most research-intensive universities, the real issue is the sustainability of research funding. For more teaching-intensive universities, student maintenance is the priority. Living costs are putting students off applying and leading increasing numbers to work more hours during term time, to the detriment of their studies. Towards the end of my time as Vice-Chancellor at Sheffield Hallam, a university which educates more students from low participation neighbourhoods than any other, I was becoming increasingly concerned by the extent to which financial challenges were impacting on their ability to engage with the studies and the wider opportunities university offered.

There are some conclusions from this analysis. There is no solution to the funding challenge which does not involve hard thinking about the structure of higher education. The 2012 reforms built on a policy framework which had created not just individually outstanding universities, but an exceptional and increasingly accessible higher education system. And the 2012 reforms were also, in their early years, successful in further widening participation, removing upfront barriers to accessing higher education – a social good which should not be understated. Our key policy priority should not simply be maintaining the excellence of globally highly rated universities, but the inclusive excellence of our system. This means that universities will need to explore fundamental change in the way they work. They make lamentably poor use of their estate and technology, despite extra-ordinary technological and social change. As Shitij points out in his paper, they operate on class size ratios which are out of kilter globally, and they have been poor at collaborating on delivery – despite the fact that in most disciplines, first-year courses at different universities are almost indistinguishable.

There’s no realistic solution to the funding challenge without a hard look at the sector as a whole and the operating models of universities within it. It needs a much more radical overhaul that focuses on how tertiary education is provided in a system in which UK continues to be a global provider of first class higher education. University leaders need to get ahead of the policy debate, work out what reforms and reshaping they can undertake themselves, and communicate those effectively to politicians and the public.

 

Professor Sir Chris Husbands is a former Vice-Chancellor of Sheffield Hallam University and is now a Director of Higher Futures.