Contributors: Tim Rhydderch, Robert Johnson

Higher-education institutions in the United Kingdom increasingly rely on international students to offset shortfalls in domestic funding – a structural dependency that has become central to the system’s viability. This makes them uniquely vulnerable to fluctuations in demand from overseas students, which may be affected by other policy objectives. This trade-off has important implications for financial sustainability, particularly where institutions or regions are most exposed to changes in international-student demand. This publication presents a new analysis by the Tony Blair Institute for Global Change of institutional data, visa trends and university finances to highlight these consequences of the current higher-education funding model.

It is now widely recognised that the UK’s higher-education sector is under serious financial strain. Modelling by the Office for Students – the sector’s regulator in England – projects that nearly half of all institutions in England will run a deficit in 2024/25. Frozen domestic tuition fees, rising pension and staffing costs, and, increasingly, falling international enrolments are eroding the sector’s financial resilience.

Until recently, university budgets had been buoyed by a surge in international-student income – which reached £9.4 billion in England in 2022/23 and accounted for 20 per cent of the sector’s income – as well as a revaluation of university pension schemes. But that temporary boost has masked deeper, structural weaknesses, with almost half of all universities in England expecting to run a deficit for the current academic year.

The outlook is deteriorating. Projections published in November suggest that by 2025/26, 72 per cent of providers in England could be in deficit, with 40 per cent expected to have fewer than 30 days’ liquidity – a clear signal of systemic risk.

This growing financial fragility reflects deeper issues that have emerged since the shift towards a tuition-fee-based model.

Direct government funding for teaching has been gradually replaced, following major reforms under the Coalition government, by tuition fees, primarily funded by government-backed student loans. Direct funding has decreased by more than 60 per cent since 2010/11, and more than £11 billion was lent to students in 2023/24 alone. Tuition fees made up just 24 per cent of university income in 2005/06 but have exceeded 50 per cent since 2019/20, while direct government grants have fallen from 39 per cent to just 12 per cent over the same period.

Tuition fees now make up the majority of university income in England (higher-education funding models differ in Scotland, Northern Ireland and Wales). But the value of these fees has been steadily undermined by inflation. Contrary to original plans, which envisioned inflation-linked rises, the fee cap for undergraduates in England has been frozen since 2017, leading to a steady erosion in fees’ real-terms value.

In today’s prices, the £9,250 fee is worth just £6,200 – the lowest per-student funding since the mid-1990s. The Labour government announced in November 2024 that the fee cap would rise to £9,535 for the 2025/26 academic year – the first nominal increase since 2017, though some of the gains are likely to be offset by the increase in National Insurance contributions.

Institutions have responded to the ongoing funding squeeze by delaying capital projects to avoid breaching borrowing covenants, increasing their exposure to infrastructure pressures as student numbers grow. Structural deficits remain: the funding model contains no mechanism to cover an annual UK shortfall of £6.2 billion for research and £2.0 billion for domestic undergraduate teaching (2023/24 figures). One apparent consequence has been a growing reliance on contingent staff, with only 67 per cent of academic staff on permanent contracts compared to 94 per cent in the wider labour market.

Financial strain is forcing universities to make tough decisions, such as redundancies and cuts to courses and services. As a commentary from the Higher Education Policy Institute points out, a university with 40,000 students and 4,000 staff could face job losses exceeding those at Port Talbot steel mill (approximately 3,000) if it were to fail.

Universities have increasingly relied on higher-paying international students to offset funding shortfalls and this group has become a major driver of net-migration figures for the UK.

In 2021/22, international students comprised 24 per cent of all students in UK higher education, compared to 17 per cent in 2011/12 and just 12 per cent in 2001/02. This increase was driven primarily by a growth in postgraduate, rather than undergraduate, enrolments; the number of students starting postgraduate courses rose by 77 per cent between 2018/19 and 2021/22.

The growth in international-student numbers has been matched by a sharp rise in their financial contribution to the sector. In the 2023/24 academic year, nearly a fifth of UK universities’ total income came from the tuition fees of students from outside the European Union – a 15-fold increase since 2000/01. In real terms, income more than doubled over just eight years – rising from £4.7 billion in 2016/17 to £10 billion in 2023/24. The average cross-subsidy from international students towards the cost of education for domestic students is £2,588 per year.

Student migration hit a peak in 2022, with approximately 484,000 sponsored study visas issued – 38 per cent more than were issued in 2021. This was driven almost entirely by a sharp rise in non-EU students.

By comparison, new student enrolments from the EU fell by more than half in the first post-Brexit academic year. This decline followed the end of free movement, which removed access to home-fee status and student loans, and introduced visa and cost barriers for new EU students. This trend mirrors the wider impact of post-Brexit reforms introduced under Boris Johnson’s government, which resulted in a significant increase in immigration and net migration from countries outside the EU.

The rising number of non-EU students has been matched by a sharp increase in the number of dependants, with around 134,000 visas issued in 2022, eight times more than in 2019.

Data from Oxford University’s Migration Observatory show that the increase in dependants was primarily linked to higher student migration from India and Nigeria. Nationals of these two countries made up almost three-quarters (74 per cent) of dependant study visas issued in 2022; 60,200 were issued to Nigerians (45 per cent) and 38,800 to Indians (29 per cent).

This reflects a broader shift in the composition of student migration since Brexit, with non-EU nationals – particularly from sub-Saharan Africa – far more likely to arrive with dependants than their EU counterparts.

TBI analysis of Home Office data found that in 2023 EU students brought on average one dependant per 100 arrivals, compared to 32 for non-EU students and 124 per 100 for students from Nigeria, who constituted one of the biggest drivers of international-student growth during this period.

Until January 2024, all postgraduate students were allowed to bring partners or children as dependants. Since then, under reforms introduced by Rishi Sunak’s government, this has been restricted to those students enrolled on research programmes (usually a PhD) only. This has led to a fall in dependants, to six per 100 non-EU students, as well as a fall in overall study-visa applications.

There was a 17 per cent drop in study-visa applications in August 2024 compared to August 2023 – with the sharpest falls from countries such as Nigeria and India, which had previously driven growth in demand for postgraduate taught courses. Home Office figures show a more dramatic drop of 31 per cent in sponsored study visas (this includes dependants) from 2022/23 to 2023/24.

However, early 2025 data point to signs of recovery, with total student-visa applications increasing in the first two quarters of the year. While this suggests a potential rebound, the full picture will become clearer as the new academic year begins.

While not exclusively aimed at international students, recent policy changes under the previous government – including restrictions on dependant visas, higher visa fees, limits on switching to work visas and a review of the Graduate route (which allows international students to stay and work for two years (three with a PhD) after graduation) – have clearly affected their ability to study in the UK. The effects of these shifts are evident in the drop in applications shown below.

Labour has pledged to reduce net migration as part of a broader reset of the UK’s immigration system. This implies an important trade-off between two policy objectives: reducing migration and maintaining financial sustainability within the higher-education sector.

The May 2025 immigration white paper includes reforms that aim to tighten the rules around international students, such as changing the length of time that most students are allowed to stay in the country post-study under Graduate-route visas from two years to 18 months, raising English-language requirements and tightening visa eligibility for applicants from countries with high asylum-claim rates. The white paper also includes proposals for a levy on international-student fee income (likely 6 per cent) to be ringfenced for investment in education and skills. The modelling for the paper assumes that, as a result of these reforms, the number of international students in the UK will reduce.

The white paper also sets out to address abuse of the student-visa system, tightening compliance expectations for institutions that fall short of Home Office standards. Retrospective analysis found that 22 institutions – collectively sponsoring around 49,000 international students – would not have met the proposed compliance thresholds.

The impact of both the changes enacted by the previous government and these latest reforms will not be uniformly felt, with the post-1992 institutions more likely to be affected. Although most institutions have very little financial headroom or are in deficit, the universities with the biggest budget surpluses in 2023/24 are the more research-intensive Russell Group universities. The 197 institutions with a deficit, or a surplus of less than £10 million in 2023/24, represent nearly a million students.

Compounding this, universities which have lower rankings are more dependent on international students’ fees. Figure 10 shows the relationship between a university’s global ranking (x-axis), its financial reliance on international students (y-axis) and its financial health (colour of bubble). Bubbles are sized according to enrolment numbers. The y-axis plots a ratio: the share of a university’s total income that comes from international fees, divided by the share of its students who are international. A higher ratio (towards 1) indicates that the university earns more income per international student, meaning it is more financially exposed if those students stop enrolling. Universities in the top left of Figure 10 are more financially exposed, ranking lower and with high dependency on income from international students, with many in a budget deficit. The figure shows that as their ranking improves, institutions tend to be less financially exposed to fluctuations in international-student numbers.

This suggests that institutions with lower entry requirements rely more heavily on international students’ fees to remain financially viable and have less capacity to absorb fluctuations in student numbers compared to Russell Group universities, which can compensate by adjusting entry requirements to attract more domestic and international applicants, and generally have a higher share of international students.

Recent data underline this vulnerability. Analysis of the Universities and Colleges Admissions Service (UCAS) data shows that post-1992 institutions, which tend to be lower-ranked, accepted 3 per cent fewer international applicants in 2023 than in 2022, the lowest number since 2016. These institutions’ financial vulnerability has worrying implications for social mobility, given that they provide a disproportionate share of higher-education opportunities for British students from the lowest-income backgrounds, including white working-class men, the most underrepresented group in UK higher education.

As Figure 11 shows, the universities with the least headroom, or deficits, are often vital to local opportunity in less wealthy places outside London and the South East, such as Sheffield Hallam or Leeds Beckett.

Analysis by the Sutton Trust corroborates this: the lowest-ranked areas for opportunity are concentrated in parts of the North, Midlands and coastal regions – the very places where post-1992 universities often provide the main route to higher education and local employment.

The economic contribution of international students is well recognised in Westminster. In 2021/22, they generated an estimated £41.9 billion for the UK economy – the equivalent of £58 million per parliamentary constituency or £560 per citizen.

But the impact goes beyond headline figures. As economist Tim Leunig has argued, in many towns and cities, the local university is a more significant exporter than private-sector firms. In Huddersfield, for example, the university’s turnover exceeds that of the area’s largest private employer – and unlike most large firms, it imports little while attracting substantial overseas income through international students. In more than 100 constituencies, Leunig adds, universities are among the top three exporters – more than any other sector. They support more than 180,000 jobs and drive local economies through both direct employment and student spending on housing, retail and services.

Public opinion reflects this perception of value. Recent polling for British Future shows that 65 per cent of the public would not reduce the number of international students coming to the UK.

The government faces two legitimate policy objectives: to reduce net migration and to support economic growth and opportunity, including through the contribution of the higher-education sector. Any serious conversation about student migration must recognise that, under the current higher-education funding model, there are trade-offs in balancing these two goals.

Recent reforms – including restrictions on dependents and new proposals in this month’s white paper to tighten the Graduate route – signal a clear intent to reduce international-student numbers. Government analysis suggests that these measures could reduce inflows by at least 26,000 students, including around 14,000 fewer entrants from a proposed levy on international fees and a further 12,000 due to tighter compliance rules for visa sponsorship. Additional reforms not yet fully modelled – such as Graduate-route restrictions – could push this figure higher.

It is also worth noting that proposals aimed at reducing the number of entrants address only one side of the net-migration equation. Concerns about overseas students who break the conditions of their stay – those enrolling without meeting the bar for admission or completing their period of leave to remain but then overstaying – cannot be tackled without a digital-ID system that lets people prove their status and an effective returns policy for those who cannot.

The key conclusion from these data is that – given the extent to which international students’ fees now prop up the finances of many institutions, especially those in more economically deprived areas – any fall in student numbers will have consequences. The current model cannot absorb a sudden drop without serious implications for institutional viability, course provision and regional access to higher education. As the government seeks to reform the immigration system, it is worth considering the interplay of these changes with the broader need to reform the higher-education funding system so that it is put on a more sustainable basis.