A Crisis Is Brewing at U.K. Universities

The country’s university system boasts 11 of the world’s top 100 universities, with three in the top 10—in a country that has just 1% of the global population. The system’s health has an outsize impact on both the future of the world’s sixth-biggest economy and globally important research.

That system is increasingly at risk from politics. Unlike in the U.S., where private universities and many state schools set their own tuition, in England and Wales the government sets a price cap on tuition for all domestic undergraduate students—the same cap for every college from Cambridge to Coventry. Since 2010, the price cap has remained essentially frozen, even as inflation sharply raises costs. Northern Ireland cuts tuition in half for domestic students. In Scotland, there is no tuition at all.

The upshot: While U.S. universities charge ever higher tuition in an arms race for the best facilities and research, leading to a soaring student debt crisis, U.K. universities have the opposite problem. They aren’t able to charge enough.

To bridge the gap, they are cutting back on everything from research to teacher salaries to dorm rooms, and teaching more classes online. They are increasingly relying on foreign students, who are charged market rates. And they are cutting back on local students: The percentage of British teens going to college is now falling for the first time in generations.

“It’s a turning point," said Simon Marginson, a professor of higher education at the University of Oxford. Even the U.K.’s most elite universities could see finances and quality decline if the government doesn’t step in, he said. A new report this month by the House of Lords said the university funding system in the U.K. wasn’t sustainable and faces a looming crisis.

About 30 universities reported financial losses in the latest academic year, a number likely to triple this year to about one in four overall, according to the government regulator, which nevertheless said the overall system remained sound. Teacher strikes for higher pay affected about 83 universities last year.

Rankings for U.K. universities, while still the second best in the world after the U.S., fell in nine of the 13 metrics measured by Times Higher Education, including for the global reputation of its research and teaching. The U.K. data firm will release its latest university rankings on Wednesday.

‘Not in a million years’

The vast majority of universities in the U.K. are public, financed out of the annual government budget. That means politicians and bureaucrats, and not the universities themselves, decide tuition. Since 1998, when U.K. universities started charging tuition, the government has raised the tuition level three times, drawing howls of protest from students.

There is no relief for university budgets coming soon. Raising tuition at a time when average salaries in the U.K. have fallen the past two years because of high inflation is “just not going to happen, not in a million years," Robert Halfon, the higher-education minister for the conservative government of Prime Minister Rishi Sunak, said in an interview with Times Higher Education. The opposition Labour Party, heavily favored to win elections next year, usually talks about cutting fees rather than raising them.

Halfon declined to be interviewed for this article. A spokesperson for the department said: “We are keeping maximum tuition fees frozen to deliver better value for students and for taxpayers and keep the cost of higher education under control," adding that the sector is financially stable overall.

“Ultimately, it means we will not be able to deliver such a high-quality education," said David Maguire, the vice chancellor of East Anglia University, which has a creative writing course whose graduates include Nobel Prize winner Kazuo Ishiguro and novelist Ian McEwan. “So we won’t be able to attract the brightest and the best to our universities, who will then feed through into the U.K. economy, which is really built on services and knowledge."

U.K. universities have helped produce breakthroughs such as the theories of evolution and gravity, the discovery of penicillin, the structure of DNA and, more recently, the AstraZeneca COVID vaccine. British universities are currently researching cancer cures, artificial intelligence and next generation batteries for electric vehicles, among other vital issues. More than a quarter of today’s world leaders were educated at a U.K. university, second only to the U.S., according to the Higher Education Policy Institute, a U.K. think tank on education.

Since 2012, annual tuition for domestic students in England has been raised only once, in 2017, from £9,000 a year to £9,250, or from about $11,200 to $11,500, an increase of 2.8%. Adjusting for inflation, fees have actually declined by about a third since 2012, according to DataHE, a higher-education consulting firm. Had tuition kept up with inflation, it would be close to £14,000, it estimates.

Over the same period, U.S. tuition at private, nonprofit universities rose by 40% in nominal terms and nearly 10% after inflation to an average $34,041. Public universities raised annual tuition for in-state students by 34% before inflation and 5.4% after inflation to an average $9,596, according to data from the U.S. Department of Education.

Britain’s Russell Group universities, the rough equivalent of the Ivy League, ran a deficit close to £2,500 per U.K. student for the 2022-23 school year, a shortfall that will double to £5,000 per student by 2030, according to data released by the group, which comprises Britain’s 24 most research-intensive universities.

“The one jaw-dropping thing I’ve learned in my first three months is just how perilous the higher-education sector is financially," Oxford University’s new vice chancellor, neuroscientist Irene Tracy, told a higher-education seminar in March. “We really have a worrying financial future."

Middle ground

The U.K.’s experience raises questions about which model for higher education works best, and who should pay: students, who benefit by making higher earnings the rest of their lives, or taxpayers, who have to weigh support for education against other priorities, from defense spending to healthcare.

Private U.S. universities charge market rates, with lower-income students getting financial aid. This system has produced the world’s top quality higher-education system, a huge boon to the U.S. economy. But its skyrocketing fees have made college unaffordable for some, caused the nation’s student debt to swell to $1.6 trillion and created growing unease over whether a pricey college education is worth it.

At the other end of the spectrum are most European universities, as well as those in Scotland, where tuition is free and schools are subsidized by the government. This is usually popular with voters, and in theory means even the poorest family can afford college. But because taxpayers foot the bill, governments cap the number of students to manage costs, limiting access.

European universities are well regarded but largely absent from the top ranks of global universities, and they produce less groundbreaking research, despite Europe’s wealth, history and development.

England and Wales, along with some countries in Asia and elsewhere, have tried to hit a middle ground. Starting in 2012, the government reduced the amount of public funding to universities while sharply raising the cap on tuition and abolishing limits on the number of students. Far greater numbers of British teens, including those from the poorest households, went to university than ever before.

For politicians, the model came with two big downsides. Because the government sets the price rather than universities, students and voters blame politicians for rising tuition instead of universities.

Second, because all tuition and expenses in the U.K. are paid upfront by the government—students begin repaying after graduation at a rate based on their income over a threshold—the government found it was suddenly spending more than it wanted on the new system, thanks to both higher fees and growing numbers of students. Further, if the income threshold isn’t met, the government after a number of years writes off the loan. The government says it absorbs about half of all student loans in this way.

The combination of spending more public money and still getting blamed by voters for higher fees has put politicians off any further increases to the tuition cap.

“There is a sense in the U.K. that the model is broken, but there’s no political will or money to fix it," said Phil Baty, chief global affairs officer of Times Higher Education. The decline in standing “can have worrying consequences for future partnerships, investments and collaborations."

In an interview, U.K. Chancellor of the Exchequer Jeremy Hunt said the introduction of tuition, while controversial, had expanded access and quality for British students, and said the U.K. government had ramped up grants for research spending to the sector. But he added: “I don’t pretend…that U.K. students through the student loan system aren’t expensive and those are not immune to the other pressures on spending" faced by the government. He praised the sector for diversifying into international students.

Bunk beds

The tuition cap wasn’t such a big deal when inflation was at 2% a year, but makes a big difference with prices surging an average 8% in 2022 and likely rising a further 7% or so this year.

The effect of inflation in the past two years has wiped out more than £3 billion a year in revenue for universities, according to DataHE. If inflation remains relatively high in coming years, universities will face ever larger deficits.

For university officials like Maguire, who was brought in to East Anglia to help bridge a £30 million annual budget shortfall, it means slashing costs. His university has laid off some administrative and teaching staff, and cut back on some areas of teaching and research, though he declined to specify which. “Like any business, you have to manage your costs," he said.

Having larger deficits from teaching domestic students leaves universities with less money to fund academic research, which is usually paid for by the government, the universities themselves and private sources such as companies. Historically, universities lose money on research—spending more than they make back in revenues from such things as patents or spinoff companies. In the 2021-22 school year, for instance, U.K. universities spent £14.06 billion on research and got £9.5 billion back in revenue, according to government figures.

While research spending has grown slightly in recent years, university leaders say that is now at risk if universities face larger deficits in other areas.

“We’ve got a problem on sustainability of research funding," said Vivienne Stern, the Chief Executive of Universities UK, which represents universities. “The whole system is creaking."

Universities are relying far more on online teaching, even after the pandemic. Isabelle Cory, a 19-year-old studying biology, chose University of York because it has an excellent academic reputation and the school said it emphasized in-person teaching and contact with professors. But in her first year, the 2022-23 school year, she said five of her six courses were online, with students often watching prerecorded lectures and only occasionally seeing a teacher to discuss the lectures. This year, half her courses are still online, she said.

“After Covid, I worked out that I don’t appreciate online learning as much as in-person lectures. That was the basis of going for York instead of the other universities I applied for," she said. “And to come, it sort of feels like I have been misled in terms of the contact hours and in-person teaching."

A University of York spokesperson said the school had high-quality, inclusive programs predating the pandemic that combine in-person and online delivery, saying the approach was valued by students.

In addition to the teacher strikes, which shut down some classes in many schools, some teachers are boycotting giving grades for exams and papers, meaning tens of thousands of students this summer didn’t graduate on time and don’t have final grades to show prospective employers.

Tyler Pugh, an American from Virginia doing a master’s degree in social policy at the University of Oxford, said teacher strikes deprived him of over half of his promised courses in his one-year degree. An ongoing teacher grading strike has also denied him an on-time graduation. “While the impact on me and students was negative, I understand where professors are coming from—they are trying to make people listen," he said.

Without money to build new dorms and facilities, some universities are telling students this year they may have to stay in hotels or use bunk beds to double up in housing. There are only 680,000 purpose built dorm rooms for university students in the U.K., compared with 1.4 million students that need housing, according to a recent study by PwC and StudentCrowd, a U.K. student online forum. Glasgow University said this summer it won’t offer campus housing to students who live within an hour’s drive.

The number of foreign students at U.K. universities has soared in recent years as universities chase revenues. Tuition for foreign students has also soared. Average tuition at Russell Group universities for foreign students has climbed to £23,750 from £18,000 in 2017—a faster pace than increases in tuition at U.S. private universities.

That creates an incentive for U.K. universities to prioritize foreign students over domestic students.

Universities have taken in much larger numbers of students in recent years, both domestic and foreign. But the growth in domestic students has now stalled, while the numbers of foreign students continues to grow quickly. The proportion of undergraduate foreign students at Russell Group universities rose to 25.6% from 16% five years ago, according to government data.

“The only way to make up the difference is to rebalance the student cohort so that you have overall more tuition from international students than home students," said Colin Riordan, the vice chancellor of Cardiff University, a member of the Russell Group. “The proportions have to change, that’s it."

That has sparked concern that British teens are starting to find themselves shut out of their own top universities. Last year, recruitment places for domestic students by top British universities fell by 13% in 2022.

The percentage of British teens getting into their top choice university fell to the lowest level since 2011 last year, which may have an effect on the idea of going to university altogether. For the first time, the percentage of 18-year-old English students going to university fell for the second consecutive year, according to government figures.

To keep the percentage of English teens going to university from falling further, U.K. universities would have to create 45,000 new places for domestic students by 2030 just to keep up with population growth—something universities are unlikely going to do given they make a loss on domestic students.

“How are we going to afford them? At the moment, the system will not be able to take these 45,000 new students," said Colin Bailey, president of Queen Mary University in London, which caters mostly to low-income students.

Overseas students generally make up less than a quarter of the student body in most top private U.S. universities, but they are more than a third at Oxford and Cambridge and more than half at other leading institutions including Imperial College, University College London and King’s College. In dozens of graduate programs, they are three-quarters.

The number of newly enrolled students from China in U.K. universities increased to almost 100,000 in 2021 from 62,000 in 2015. For Indian students, the number of incoming freshmen grew to 87,000 in 2021 from just 9,000 in 2015, according to the U.K.’s Higher Education Statistics Agency.

Depending heavily on foreign students leaves university finances vulnerable to factors outside their control, such as geopolitics and government immigration rules, university officials said.

“Universities create highly skilled, economically competitive workforces," said Mark Corver, the head of DataHE. “It is odd then to have a situation where government heavily incentivizes the most sought-after universities to prioritize their capacity to equip the workforce of economic competitors over the domestic economy."

Write to David Luhnow at david.luhnow@wsj.com