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28 November 2018 0 Comments
Posted in Education, Opinion

Universities surviving on short-term loans?

Posted by , Paralegal

Matt Robb, from EY Parthenon, was recently reported as saying that three or four UK universities are close to insolvency and currently surviving on ‘bridging loans.’ But, the number facing severe financial instability could be much higher.

Converting grants into income-contingent loans, increasing tuition fees and removing caps on student numbers has affected government funding, application numbers and, most notably, the income stream of ‘post-92 institutions’.

In 1985 the research and teaching elements of grants were separated, providing some funding to universities with strong research capabilities and some to cover teaching costs without using tuition fees. In 2004, £3,000 fees were introduced to ‘top-up,’ not replace, core funding by the state. In 2010 the ‘top-up’ initiative was abandoned, £9,000 fees were intended to cover the whole cost of teaching and replace teaching grants. Consequently, universities have become primarily dependent on two sources of income – tuition fees from students, and research grants from the Government.

Russell group universities and those perceived as ‘prestigious’ are often elite research institutions receiving the majority of Government research grants. Universities established under the Further and Higher Education Act 1992 traditionally focused on teaching and are increasingly dependent on tuition fees as teaching grants have reduced.

When the Government removed caps on student numbers, the elite institutions lowered their entry requirements which drew applicants away from post-92 institutions and affected their financial viability. Increasing the number of student at research institutions grows their revenue while limiting the income tuition fees available to teaching-focused universities.

Universities are pivotal for local economies and employment, both of which will suffer if universities fail to be financially stable. It is unclear whether the Government would bail out institutions in this situation, but they should focus on diversifying their finances and being less dependent on a single revenue source.

Accessing debt and capital markets is increasingly common, particularly in the United States, to finance commercial ventures. Oxford University Press, for example, has facilitated large bond issues for the University. However, to successfully repay loans, institutions must generate income and profit. That task is further hampered by expensive bridging loan repayments.It is unlikely that the Government will reverse the marketisation of education because it minimises the state’s financial commitment while maintaining investment in the sector. Consequently, it is essential for institutions previously relying on a steady stream of applicants to further diversify in order to become commercially competitive.

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