The UK higher education sector is currently navigating a complex landscape of policy challenges that demand urgent action from government. As universities strive to maintain their global standing and provide high-quality education, they face serious funding challenges and growing burdens from regulatory and governing bodies. With the arrival of the new Labour Government, there is hope that the sector will receive much-needed political attention.  

But what are the most pressing challenges the HE sector faces today, and what should be on the Government’s agenda?  

Financial Sustainability 

The financial health of UK universities is under significant strain and becoming increasingly precarious, posing a fundamental challenge that requires immediate government intervention. According to the Office for Students’ research on the financial stability of the sector, financial performance for universities has been weaker than previous years, with net cash flow falling from £4,795 million in 2021/2 to £2,907 million in 2022/3 - a reduction of 39%. Many institutions are experiencing budget deficits, with reports indicating that up to 40% of universities are forecasting deficits for the current financial year. Further, financial pressures are forcing universities to delay necessary capital investments and consider mergers/restructuring as short-term solutions. The implications of these financial challenges extend beyond individual institutions; they threaten the overall quality and accessibility of higher education in the UK. 

Universities have faced a decade of escalating financial constraints – most notably the freeze on domestic tuition fees and rising inflationary costs. The fee cap for domestic students has remained essentially unchanged since 2012, with only a minor uplift in 2017, effectively reducing its value in real terms to approximately £6,000 today. This stagnation has severely constrained universities' ability to cover operational costs and invest in future growth. It is critical to note here that the financial performance and strength of universities vary significantly – Oxford, for example, has maintained a surplus over the last three years.  

Compounding these issues is the sector's growing reliance on international student fees to subsidise domestic teaching and research activities. This model is inherently risky, as fluctuations in international student numbers can significantly impact financial stability. Recent immigration policies have added further uncertainty, potentially deterred international students and exacerbated financial vulnerabilities. Examples include restrictions on family members joining students, barriers that prevent switching into sustainable work routes, and increasing visa fees. These are likely to impact the attractiveness of the UK as a destination for overseas students.  

International Student Recruitment 

The international reputation and recruitment of international students are currently critical components of the UK's higher education financial sustainability, yet universities are currently facing significant challenges in attracting overseas students. Despite reaching a record high of 758,855 international enrolments in the 2022/23 academic year – a 12% increase from the year previous – there are signs of decline throughout 2023 and early 2024. 

This downturn is partly attributed to the UK policy changes mentioned above. However, international factors, including geopolitical tensions and economic uncertainties in key markets like Nigeria and India, have further exacerbated the situation, with visa issuances dropping significantly. 

The decline in international student numbers poses a substantial financial risk for universities. A continued drop in international enrolment could lead to severe financial shortfalls, potentially resulting in budget deficits for up to 84% of higher education providers by 2026-27 if current trends persist. There is also substantial risk for local economies across the UK. According to a 2023 report, the total net impact on the UK economy of the cohort of first-year international students enrolled at UK HEIs in the 2021/22 academic year was estimated at £37.4bn across the duration of their studies.  

It is paramount that policymakers address these challenges and either reform the funding model and size of the sector, balance immigration policies to allow for growing numbers of international students or provide universities with more funding through increased domestic fees and other public grants. What is undeniable is that the current model is unsustainable for most (although not all) universities in the UK.  

The Need for Digital Transformation  

The UK higher education sector is grappling with the urgent need for strategic adaptation and digital transformation. Yet, it lags significantly behind other sectors in being able to adapt to and adopt emerging technologies. This technological inertia is becoming increasingly problematic as students question whether universities equip them with the skills needed to begin careers that are personally and professional fulfilling.  

The financial burdens facing universities exacerbate this situation, slowing the adoption of new technologies due to limited budgets and arduous procurement processes. These hurdles prevent institutions from fully integrating transformative tools like generative AI at an institutional level, which could otherwise enhance learning outcomes and operational efficiencies. As a result, students often find themselves unable to access premium AI products without incurring additional costs, thus widening existing inequalities in educational opportunities. This digital divide is particularly evident in the varying access to AI tools among students from different socioeconomic backgrounds, further entrenching disparities. 

For universities to remain competitive and fulfil their role in preparing students for the modern workforce, a fundamental shift towards embracing and integrating digital technologies is imperative. As covered by Policy Connect and the Higher Education Commission in Digitally Enhanced Blended Learning (2024), current procurement approaches are resource-intensive and costly, presenting a barrier for institutions looking to upgrade key administrative, learning and teaching technologies.  

Policymakers must prioritise initiatives that streamline procurement processes and provide financial incentives for technological upgrades – it can be a practical step in cutting redundant costs. We should ensure that universities are not only keeping pace with technological advancements but are also leading in innovation, enhancing the educational experience and ensuring equal opportunities for all students. Without such strategic interventions, the sector risks falling further behind, undermining its ability to contribute effectively to the nation's economic growth and social equity goals. 

From HE to Tertiary 

The HE sector will also need to grapple with the new Government’s desire to drive forward the skills system by better integrating further and higher education. The intent was made very clear with the appointment of Minister Jacqui Smith to oversee both FE and HE. HE has often been siphoned off from skills policymaking despite playing a major role in the skilling, upskilling and reskilling of major parts of the labour force. Choosing to pursue a master’s at a university is functionally equivalent to undertaking a higher-level qualification in an FE college when it comes to the learner’s hopes (e.g. upskilling and entering a new career path) and the benefits for the country (e.g. higher skilled workers and higher wages).  

We are entering a new landscape where HE is going to be thought of as one part of a tertiary landscape rather than its own distinct entity, and we welcome this. However, it does mean universities will need to adapt and policymaking will need to help them to do so. They will need to be given new incentives to collaborate with other tertiary providers rather than compete for students, as is often currently the case. With the new Government talking up the prospects for further regional devolution and local plans for skills and the economy, local government (such as mayoral combined authorities) will need to play a key role. Local government actors will need to oversee the role of different education institutions in its region, including HE providers. They will need to ensure that a wide range of pathways are available between the different providers and that they avoid too much competitive overlap.  

Adaptation will not be easy for all institutions, but institutions would benefit from a more collaborative and localized tertiary landscape. For one, it would mean providers would avoid the significant costs of competing against each other. It would also mean clearer pipelines for students to go between institutions, benefiting all involved. And it would give providers a clearer role as anchor institutions in their communities, with all the benefits that provides. 

Conclusion

Despite the challenges facing the higher education sector, this is an opportune moment to reform approaches for the better. The Government faces a plethora of challenges and has thus far proved reluctant to announce concrete policy solutions. The sector will hope that the budget scheduled for 30 October will provide more clarity about the Government’s policy and funding strategy for higher education.