How to pay for the high cost of good quality undergraduate study for the growing numbers of young UK students who aspire to go to university is once again rising to the top of the policy agenda.

The trade-offs of the two broad approaches currently pursued are familiar. Direct government funding typically comes with limits on both student numbers and funding-per-student ¨C shaped by competition from other pressing areas of public expenditure rather than the level of demand or need.

Alternatively, the student pays the full cost and universities are allowed to grow to accommodate demand. This is broadly the system in England and Wales, with the introduction in 2012 of higher fees, paid by students via a loan, going hand-in-hand with uncapped places. This has seen significant rises in young entry rates, particularly for those living in under-represented neighbourhoods.

However, in 2023 this fee and uncapped numbers system is in crisis, with government disquiet over how things have worked out. Crudely, universities are seen by politicians as taking money for teaching up front, leaving the risk of poor outcomes with government and taxpayers. The proportion of student loans that are not expected to be paid back, recorded as a cost to government when the loans are made, has in recent years hovered at around 50 per cent. With?more than ?20 billion a year being loaned for full-time ÖйúAƬ alone, the outstanding debt was around ?200 billion in 2021-22 and is expected to grow rapidly.

ÖйúAƬ

In return for all this spending, politicians worry that they are getting neither responsiveness to policy nor the competitive market mechanisms they hoped would achieve the same. Worse, they have found that the heavy subsidy the government provides through the loan is invisible to students, who believe they are paying far too much for far too long on unfair debts and interest. Increasing the tuition fee cap is seen as political self-destruction.

Politicians, then, have become disinclined to help universities, even as high inflation has set about destroying the economics of the system. The real unit of resource has fallen from ?9,000 in 2012 to around ?6,000 today. Universities have, in effect, lost around ?3 billion from their annual teaching incomes in less than two years.

ÖйúAƬ

One response for universities is to wait it out and hope things get better. But even if inflation were to fall to zero tomorrow and stay there, the funding damage has already been done. Worse, the historical data is fairly evenly split between lower, similar or higher inflation following the current inflation trajectory. Either way, with no reason to expect government rescue, universities are forced to act now for the possibility that already depleted real fee levels will get worse.?

The obvious tactical response is to progressively swap uneconomic fee-capped UK undergraduates for higher-fee international students: in effect, to subsidise UK students with international fees. This response intensified in the unprecedented 2022 cuts in UK undergraduate recruitment at highly selective English universities while the number of international entrants continued to grow.

But the strategic drawbacks are many, starting with how acceptable the subsidy argument is to those who lose out. Around a quarter of degree places at selective UK universities now go to international students. Would the public support reserving a quarter of UK hospital capacity for fee-paying overseas patients to help subsidise the remainder of beds? If not, should a similar subsidy argument be made so readily for university places? What is the risk to high public support for universities if a perception takes hold that UK students are increasingly being denied places not on academic merit but simply for money.

This danger is perhaps greatest when it comes to widening participation. As recently as 2016, English Russell Group universities admitted around as many UK students from under-represented (POLAR Q1 and Q2) backgrounds as they did international students. By 2022, far more places were being used for the latter than the former, not least because of a sharp reduction in the intake of under-represented students in 2022.

ÖйúAƬ

Beyond how thwarted applicants might see this response, it also makes for a questionable wider strategy. Universities create highly skilled, economically competitive workforces. Ambitious countries usually seek to increase ÖйúAƬ participation. It is odd, then, for government to so heavily incentivise the most sought-after universities to prioritise equipping the workforces of economic competitors.

In addition, many universities do not have enough higher-fee students, or enough of a fee differential, for this tactic to make a difference. Their only response, then, is to try to recruit more but spend less on each student. Yet this would probably result in a lower quality of university experience. Students would be less satisfied and the utility of graduates to the economy would be diminished.

Reduced funding would also show up in statistics such as staff:student ratios, pushing UK universities down international rankings. And even this uninviting future relies on the questionable assumption that there would be continuing strong domestic demand for what might well be viewed as an underfunded, second-rate experience.

No business can survive for long when the law keeps its prices below that of its costs. And with the responses available to universities being either ineffective or counterproductive, the UK as a champion of domestic aspiration and international-standard quality must now be in peril.

ÖйúAƬ

Minor changes seem unlikely to be enough. Students, universities and government will all need to tolerate some relative losses to get to a better solution overall. But with the existing system now deep in crisis, policymakers might well find a rapid and bold resetting of the UK¡¯s systems to be worth the risk.

Mark Corver is co-founder and managing director of dataHE. This is an abridged version of an essay he has written for the ÖйúAƬ Policy Institute¡¯s 20th anniversary report, .

ÖйúAƬ