In a 71-page report, the regulator warns higher education providers in England to “re-test their assumptions” about student growth and noted a marked decline in financial performance in 2022/23, as reported by The PIE News in May.
And it advises HE institutions to look again at their funding models to reflect declining surplus levels, cash flow and net liquidity.
The OfS says that in the worst-case scenario, a significant decline in international student numbers could lead to up to 80% of institutions being in deficit.
Here, we review the other key points of the report that you might have missed.
While the OfS notes that the UK sector is forecasting “an improvement” from 2026/27 and beyond, it warns that this relies on overly optimistic recruitment predictions.
It says its own modelling on recruitment rates actually suggests that the situation is “likely to be even more challenging than providers have forecast and the longer-term recovery they forecast is significantly uncertain”.
It continues: “Without the growth assumed in providers’ student recruitment forecasts, our analysis suggests that the recovery providers are anticipating would be reversed and the financial situation would continue to weaken across the period to 2026/27 unless mitigating action is taken.”
Providers have also anticipated an uplift in fees from international students, the OfS says. But it advises caution, noting that there’s considerable “uncertainty” about whether international students’ fees will actually boost the coffers, given “the increasing volatility in the international market, and the sensitivity in some particular countries to price and other economic factors”.
One modelled scenario saw a “very modest” increase in UK entrants and a 45% drop in international entrants across the sector in 2024/25 compared to 2023/24 and no growth for the rest of the period forecasted in the report. This model could result in a net reduction in income of over £8.4 billion by 2026/27, the report warns.
“This scale of impact would represent a significant challenge for the sector to overcome and based on the latest information about international recruitment, appears to be realistic,” it says.
In a part of the report that’s likely to cause consternation in the sector, OfS says it’s becoming harder to predict which providers will suffer from an increasingly volatile international student market.
It points out that the situation is even more unpredictable for providers that are “particularly exposed to changes in recruitment from individual countries”.
While providers have generally forecasted a “significant uplift” in tuition fees from international students, the unpredictability of the market means it’s not clear whether this is realistic, the report says.
It continues: “The forecast increase in income therefore heightens the impact on providers if international recruitment is not as expected and also creates a risk that less income is received from students who are recruited.”
The message? Be ready for change, and prepare to make some tough calls.
“Providers… need to have plans in place to respond proactively if they are not able to achieve their student number targets and to respond to other risks that may be present in their specific context,” the report says.
“We know that many are taking action to secure their financial position. While this can involve making difficult decisions, leadership teams are right to take action to ensure their institutions are financially sustainable over the medium to long term and to ensure they can continue to provide a high quality education to students.”
The report shows that the number of Indian students coming to England for higher education surged by 47.5% between 2020/21 and 2021/22, according to the report, and increased by a further 66.5% the following year.
But the OfS points out that Home Office data shows a reversal in this trend, which the number of Indian students seeking visa applications falling by a marked 11% between December 2022 and December 2023.
Nigerian students at English providers appeared to follow the same pattern. Numbers increased by a whopping 122.5% and 84% between 2020/21 and 2021/22 but visa applications dropped sharply by 25% between December 2022 and December 2023.
Meanwhile, the number of Chinese entrants has continued to rise, increasing by 2% between 2020/21 and 2021/22, while visa applications went up by just under 5% between December 2022 and December 2023. However, the report points out that “this is a smaller annual increase than has been seen historically”.
It’s news to nobody in the sector that fees from international students make up a significant proportion of revenue for providers, helping them to fund research and capital development.
But “intelligence” gleaned by the OfS from providers suggests that international student numbers may have fallen by up to 40% in the January 2024 intake – with some having been hit even harder.
The report says that continued reduction in international recruitment across the sector would “prompt the market to reset”.
In a stark warning, the report says: “It is likely that some providers would be successful at continuing to recruit international students even in this context, and so may face less financial challenge. Others, however, may see even sharper decreases in their recruitment. The ability to take mitigating action would vary between providers, and those unable to respond effectively could face significant risk.”
But despite these risks, providers must resist the temptation to push fees for international students to unsustainable levels. “There is uncertainty about how elastic the pricing for international students can be, and there is a risk of pricing students out of the market,” the report says.
And providers should also pay attention to the voltatility of currency exchange rates, as the OfS notes that these can have a significant impact on applications. “For example, the recent devaluation of the Nigerian naira was cited as having an adverse effect on recruitment,” it says.
While the report notes that many HE providers are tightening their belts in response to challenging financial conditions, OfS highlights the need to do more.
“Many higher education providers have taken, or are taking, action to manage tightening finances, including making cost savings, rationalising courses, modules and other activities, and making other efficiencies,” the report reads. “However, the scale of the current financial challenges facing the sector means there is an increasing need for further and bolder efforts to make cost savings to maintain financial sustainability into the longer term.”
So, what can providers be doing to stay in the black? OfS suggests it’s worthwhile to think up ways of raising cash that don’t rely too heavily on student recruitment.
It says: “We have set out concerns in this report about the optimism in providers’ student recruitment forecasts, and this means it would be prudent for many providers to consider how they would remain financially sustainable without the growth of UK students they have projected and with significantly fewer international students.”