Low student satisfaction and rising deficits spell trouble for higher education in England

Higher education providers face long-term, systemic, pressures on their financial sustainability and viability, with the proportion of providers with an in-year deficit having increased in every one of the past four years, from 5% in 2015/16 to 32% in 2019/20. Against this backdrop of deteriorating financial health across an increasing number of providers, in a report today PAC says the Department for Education is “not effectively holding the Office for Students to account” and is particularly concerned that student satisfaction, especially regarding value for money, has fallen in recent years: in 2021, 33% of students viewed their course as good value for money, with 54% saying it was not.

Some providers are heavily reliant on income from overseas students’ fees to cross-subsidise research and other activities and dependent on their ability to continue growing overseas student numbers – leaving them potentially exposed to significant financial risks.

In the short term, the higher education sector survived the COVID-19 pandemic because of the resilience of individual providers, financial assistance made available by government, the feared interruption to income from overseas students not materialising and the fact that large-scale tuition-fee refunds were not required.

But the Committee says DfE “failed to adequately assess the current and future financial impacts”of the “substantial grade inflation” that resulted from local assessment in place of A-level exams during the COVID-19 pandemic, which meant more students were able to take up places at high-tariff providers, and many medium- and low-tariff and specialist providers were undersubscribed.

Ongoing financial pressures – including pension fund deficits and predicted rises in employer contributions, inflation and rising costs, the cap on student fees, the impact of changes to student loans and potential policy reforms on entry requirements – do, nonetheless, increase the risk of providers failing; closing campuses or courses; reducing the quality of teaching; or limiting access: any of which could adversely affect students. The Committee says that in that context, protections for students if providers are in financial distress are not strong enough.

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said:

“The A level fiasco of 2020 and grade inflation have a long term impact on higher education, adding to deep systemic problems in the financial sustainability of higher education. The number of providers in deficit rose dramatically in the four years up to the onset of the pandemic.

“Too many providers are too heavily dependent on overseas student fees to maintain their finances, research base and provision – that is not a satisfactory situation in a sector that Government is leaning on to boost the nation’s notoriously, persistently low productivity.”

PAC report conclusions and recommendations

• We are not convinced that the OfS has made sufficient progress in getting a grip on the long-term systemic challenges facing the sector and individual providers, meaning that financial pressures risk harming students’ experience of university.
  • There are systemic, long-term pressures on providers’ finances. Some of the underlying factors, including pension fund deficits (and predicted rises in employer contributions), inflation and rising costs, a continuing freeze in the cap on student fees rising more quickly than income, the impact of changes to loan repayment terms and further uncertainties arising from the impact of changes to loan repayment terms and potential policy reforms following consultation on, for example, minimum entry requirements. The OfS considers that the financial sustainability of the sector appears more stable than it did at the start of the pandemic, but accepts that risks remain. The OfS relies heavily, although not exclusively, on financial metrics to identify risks to providers’ financial sustainability and has designed a regulatory approach that does not involve routine discussion with individual providers. However, the OfS currently lacks an integrated model that it can use to understand in a systematic way the combined effects of different pressures – such as changes in different costs, income streams or student numbers – on the sector and on individual institutions, although it told us that it is developing a model to allow it to do so in a more sophisticated way. Without these insights, it risks lacking the information needed to spot, and act on, early signs of distress in vulnerable providers. It also has an incomplete picture of the experience of students. For example, the National Student Survey only covers final-year undergraduates and so the OfS does not have a picture of the experiences of students earlier in their degrees. The OfS similarly does not yet fully understand new issues, such as the impact of hybrid teaching. Some providers do not believe that the OfS has all the information it needs to put financial data into context.

Recommendation: The OfS should write to us by the end of July 2022, in line with the academic year-end, setting out the actions it will take to increase its understanding of the sector and pressures on providers – and how it will demonstrate to universities and students that it has done so. 

• Despite a background of deteriorating financial health of an increasing number of providers, the Department is not effectively holding the OfS to account.
  • The Department is responsible for the overall regulatory framework of the sector and for holding the OfS to account. The OfS’s role includes protecting students’ interests from the consequences of financial risk in higher education providers which could adversely affect students. The financial sustainability of the sector has been declining since before the pandemic, evidenced most obviously by the fact that the number of providers with an in-year deficit increased from seven (5%) in 2015/16 to 80 (32%) in 2019/20. Of these 80 providers, 17 had been in deficit for the past two years and a further 20 for three years or more. The OfS does not, however have a complete set of measures by which its performance can be judged. Of the 26 performance indicators the OfS sets out on its website, eight are still in development or have incomplete performance information and a further 11 indicators do not yet have associated targets. Complete information is available for just seven indicators, giving an inadequate picture of performance. The Department asserts that it is not complacent and has committed to reviewing the set of performance metrics and ways to measure them, by the summer. Furthermore, the OfS does not ask providers for structured feedback on its own performance as a regulator. 

Recommendation: Working with the OfS, the Department should establish a complete set of robust, published performance measures and targets, including structured feedback from providers, and use these to hold the OfS to account for its effectiveness.

• Protections for students, in the event of providers facing financial distress, are not strong enough.
  • The OfS requires providers to have a student protection plan in place to address the risk of continuity of study for its students, but it has identified common weaknesses in them – including over-optimism about risks and weak refund and compensation policies. When initially registering providers, the OfS approved a number of student protection plans that it considered inadequate, so as not to delay registrations. During the pandemic, it found that it needed greater powers to intervene more quickly, and introduced a new condition of registration from April 2021 allowing it to issue directions to universities it considers at material risk of failure. However, the process of implementing a student protection plan, which the OfS described to us, appears to be reactive.

Recommendation: The OfS should prioritise ensuring that all providers’ published student protection plans are fit for purpose and sufficiently clear for students to make confident, well-informed decisions about the protections universities are promising them. 

• We are concerned that the financial sustainability of some providers is being put at risk by their heavy dependence on their ability to continue growing overseas student numbers.
  • Many providers are already highly dependent on cross-subsidy to make up deficits in publicly funded teaching and research. Much of this subsidy comes from income from overseas students’ fees; in 2019-20, there were more than 340,000 overseas students at English providers, almost half of whom came from China or India. Many providers’ medium- and long-term financial forecasts assume continued growth in student numbers, particularly overseas students. The OfS monitors providers’ forecasts and has in the past found their student number projections to be over-optimistic. There are also risks associated with an over reliance on international recruitment which may not align well with the UK’s wider geopolitical interests. The Department asserts that it is aware of such risks and is encouraging the sector to diversify in terms of where providers recruit their students from. There are also cross-government considerations, such as how student recruitment is affected by, and potentially at odds with, the Home Office’s plans to control migration. The Department recognises that it is a very competitive market and that there are many countries around the world seeking to bring in more international students, for exactly the same reasons that UK providers are.

Recommendation: The Department, drawing on OfS analysis as appropriate, should set out what it considers to be the risks to achieving the continued forecast growth in overseas student numbers universities are relying on for their future financial security, and explain how it is mitigating those risks.

• Student satisfaction with the value for money of their courses is at a worryingly low level.
  • One of the OfS’s four regulatory objectives is that students receive value for money. OfS says that students should receive the academic experience they were promised by their provider and their interests as consumers should be protected before, during and after their studies. Overall student satisfaction has been consistently over 80%, but fell to 75% in the pandemic- one of the main contributing factors being dissatisfaction with learning resources required by lockdown restrictions. The proportion of students who thought their course was value for money is much lower and dropped from 38% in 2020 to 33% in 2021, with more than half saying it was not value for money. The OfS acknowledges that students’ view that they are not getting value for money is a cause for concern. The OfS believes that quality of provision is central to how students regard value for money, and asserts that quality is one of its top three concerns. The OfS says that it is looking at quality issues closely and that working with the universities to ensure that, even on oversubscribed courses, quality remains good. 

Recommendation: The Department and the OfS should set out what action the OfS is taking to improve students’ satisfaction with value for money, including the OfS’s assessment of the impact of hybrid teaching on students’ experience and what progress has been made in addressing the causes of dissatisfaction. 

• The Department failed to adequately assess the current and future financial impacts on providers of disruption to A-level assessments.
  • The use of locally assessed grades in place of A-level exams during the COVID-19 pandemic led to substantial grade inflation in 2020 and 2021. This meant that more students were able to take up places at high-tariff providers, but left many medium- and low-tariff and specialist providers undersubscribed, who have therefore lost expected fee income. The Department had anticipated the likely impact of locally assessed grades on providers that would be oversubscribed and that could require additional funding for high-cost courses. But it had not considered the impact on those providers that would become undersubscribed. Being undersubscribed causes financial pressure on providers for an extended period, as most courses last at least three years. At the same time, oversubscribed providers risk not being able to maintain the quality of provision they have promised their students as they may not have sufficient teaching facilities or student accommodation.

Recommendation: Learning from the disruption to the higher education market during the COVID-19 pandemic, the Department and the OfS should model and review the financial impacts on providers of changes to the number and profile of domestic students over the short, medium and longer terms.

Sector Response

A Department for Education spokesperson said:

“Despite the challenges faced by universities and colleges in recent years, the most recent reports from both the NAO and the OfS make clear that overall, the sector remains financially resilient.

“Higher education is a key part of our skills revolution, which is why we have set out reforms to boost the sustainability of our world-class higher education system, including ensuring the student loan system is fairer for both students and taxpayers. This is backed by nearly £900m to support teaching and students including the largest increase in government funding for the sector in over a decade.

“We are determined to drive up quality in higher education and the OfS have recently launched the first wave of a package of boots-on-the-ground investigations that we asked them to deliver, focusing on ensuring students receive sufficient face-to-face contact hours and are on high quality stretching courses that are assessed rigorously and fairly.”