By Olaoluwa Oyewusi (BSc Politics and Economics)
[This piece is one of the top-scoring submissions from the “Government, Welfare and Policy” module for third-year undergraduates. It exemplifies the best of student work, showcasing their ability to engage and inform with standout blog-style writing. Enjoy one of this year’s top-marked essays, a testament to the students’ passion and creativity!]
Introduction
The British university system is recognised as one of the best in the world, with twelve of its institutions ranking among the global top one hundred (Times Higher Education, 2024). However, growing financial pressure threatens this reputation. This issue is highlighted by the Office for Students (OFS), an independent regulator for higher education in Britain, which reported that by 2026, up to 72% of British universities could be operating at a budget deficit. (OFS, 2024).
In response to these mounting pressures, universities are being forced to make difficult strategic choices. Staffing reviews, course closures, and restructuring plans are becoming more common as institutions seek to adapt to tighter financial conditions. These shifts raise wider questions about the long-term sustainability of the current funding model and how universities can continue to deliver inclusive, high-quality education and research in an increasingly competitive global landscape.
This blog will analyse the root causes of this crisis and propose a key policy reform of the current university funding model, aimed at not only ensuring long-term financial sustainability, but also ensuring equal access, higher standards of teaching and research, and graduate output that aligns with labour demand.
Background of British universities funding landscape
In the early 1960s, following the implementation of the Education Act of 1962 and the release of the Robbins Report, which argued that anyone with the ability and desire to attend university should be able to do so (Morris, 1964), British higher education providers saw a significant increase in government funding with the introduction state-covered tuition which meant the government covered student tuition for universities and means-tested grants which were introduced to help students from lower-income households cover their living costs whilst studying, these were designed to remove financial barriers to ensure university accessibility post-World War II.
However, increasing enrolment placed significant financial pressure on the government, leading to the Thatcher administration’s shift towards market-orientated funding models, culminating in the release of the Dearing report (1997), which prompted the introduction of tuition fees in 1998 and the introduction of the student loan system set up to provide income-contingent loans for university tuition and maintenance, with the repayment structure based on graduate earnings. They simultaneously introduced a domestic price cap, which set a maximum amount that universities can charge for British students’ tuition. These changes shifted British universities from being primarily public-funded institutions to a government-regulated, free-market system with a mix of private and public funding.
Figure 1 (Lewis and Bolton, 2024)
As seen in Figure 1, these reforms led to significant changes in the British university sector’s funding model. With tuition fees replacing government-funded grants as the main source of income for British universities, tuition fees now account for over 50% of their income, reflecting the move from direct state funding to a multi-faceted funding model.
Challenges in the current funding landscape
(1) Declining direct government funding for teaching
The British university system has seen a significant reduction in direct government funding, particularly for teaching, with funding falling by over 60% since 2010/11 (Lewis and Bolton, 2024). This reduction in public spending has left universities increasingly dependent on other funding streams. This puts a significant strain on teaching-intensive universities, and growing universities, as they often lack substantial research income or international student tuition, which makes them more vulnerable to the changes in government funding.
Figure 2 (Lewis, Bolton and Wilson, 2024)
Figure 2 illustrates the consistent fall in direct funding for teaching when the fee cap was raised to £9,000 in 2012 (Bolton, 2024); the 300% increase in the cap was intended to offset the reductions in government spending. However, the current financial state of British universities raises the question of its effectiveness.
(2) Tuition fee caps for British students
The price caps on tuition fees were set to ensure that students from lower-income backgrounds can access higher education without facing excessive costs (Bolton, 2023). Keeping tuition fees low has also allowed for a more diverse student body by reducing the financial barriers to higher education (HEPI, 2023). It has also protected British students from price hikes and helped stimulate demand for university education.
Figure 3 (Lewis, Bolton, and Wilson, 2024b)
The price cap has seen a minimal increase of only £535 since 2012 (Figure 3). This coupled with a decrease in government spending has placed increased financial pressure on universities. The Financial Times estimates that British universities lose approximately £2,500 per domestic student enrolled per year; this is due to the cap not increasing in line with inflation. As a result, universities face a reduction in real-term income because tuition is not able to increase in-line with universities operational costs, such as staff salaries, and utilities. Over time this has created a gap in university funding (ONS, 2024), particularly for universities reliant on domestic students.
(3) Over-reliance on international students
The presence of these domestic price caps led to universities relying on international student’s financially, with international fees averaging £22,000 per year (HESA, 2023). However, this reliance creates a problem, as international students have become a financial cornerstone for British universities, contributing £11.8 billion in 2022/23 alone, accounting for 23% of total income, up from around 5% in the mid-1990s (Lewis et al., 2024a). The increased reliance raises concerns about allocative efficiency, as universities divert significant resources toward attracting and retaining international students often at the expense of home students. It also raises concerns of equity as universities favour international students during enrolment over domestic students, particularly in high-cost degrees (e.g., medicine, engineering), which leads to inequality in access to university education (Pawar, 2025). This also leaves British universities vulnerable to external economic shocks and changes in global immigration policies. Given the recent declines in international student enrolment (Blake, 2024), this reliance is not sustainable long term.
Policy Recommendation
To ensure the survival and growth of British universities, I recommend the removal of the tuition cap policy. This policy reform will mean deregulating universities, allowing universities to charge tuition fees based on course demand, projected graduate earnings, and economic needs. Countries like Australia, New Zealand and the United States use similar models, allowing institutions to maintain quality education despite increased operational costs (OECD, 2023). More importantly, this reform will help ensure universities are able to reinvest into teaching and research facilities to ensure a higher quality of education.
Implementation Plan
For this policy to be implemented, the government would need to amend the standing price cap policy to allow universities to set variable fees. For this to be successful, it would need strong stakeholder engagement to build public support for the policy.
This policy will need a phased implementation, beginning with pilot schemes in select universities, with the selection varied across university rankings and geographical locations to reduce sampling bias. The results of these pilots will be monitored and evaluated to see the impact of the policy on university finances and student enrolment.
After carefully evaluating the success of the trials, particularly whether they deliver the projected financial relief to universities without affecting student enrolment, the policy can be fully implemented. It is important to note that pilot schemes take time to yield conclusive results, highlighting the need for patience.
This policy is likely to have a disproportionately negative impact on enrolment, particularly for lower-income households and those pursuing high-cost degrees (e.g. medicine, engineering). This is because, in a free market, universities may increase tuition fees significantly, potentially deterring risk-averse individuals from taking on larger amounts of debt.
To mitigate these risks and ensure equal access, it will be crucial to implement a supporting policy framework, I recommend targeted government tuition subsidies where the government pays a portion of tuition for low-income households and high-cost degrees. The targeted nature of the subsidies will ensure they are directed to students who are at the most risk of exclusion, ensuring equity in access to university education, whilst minimising costs by focusing on those most affected by the policy.
Pros and of the Policy Recommendation
Pros
(1) Increased financial sustainability – Universities will be able to adjust fees based on inflation, course demand, and graduate earning potential, providing an income stream that better reflects the quality of service provided.
(2) Improved Quality – Higher tuition fees for high-demand or resource-intensive courses would allow universities to reinvest the additional income into faculty, research, and facilities, improving the overall quality of education and student experience.
(3) Greater Market Efficiency – Students will be encouraged to make economically informed choices, as tuition fees would align with job market prospects and future earnings. This will also ensure that courses offered in universities adequately represent labour market needs.
(4) International Competitiveness – A flexible system would allow British universities to remain competitive globally, particularly compared to countries like the United States and Australia, which attract large numbers of international students.
Cons
(1) Reduced Accessibility – Higher tuition fees for high-demand courses could price out students from lower-income backgrounds, widening the socioeconomic gap in education and reducing university enrolment.
(2) Risk of Overcommercialisation – Universities might prioritise profit over academic integrity, favouring lucrative programmes over social sciences and humanities, leading to a potential decline in certain disciplines, thus reducing educational diversity.
Conclusion
British universities are close to a breaking point, with institutions facing significant financial constraints. Without decisive reforms, universities will face reduced research capacity, closures, and declining global competitiveness. The removal of the price caps paired with a supporting targeted tuition subsidy will provide a path to restoring the financial sustainability of universities. More importantly, it will help uphold the broader goals of a well-functioning university system, which are protecting equitable access, strong quality of teaching and research, and developing skilled labour that represents labour market demands. The time for debate is over, and the time for action is now. If policymakers fail to act, British universities risk falling behind on the global stage.
Bibliography
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