April is the cruelest month. It’s not just English literature professors who’ll tell you that: Their university’s treasurers probably think T.S. Eliot had a point too.
Nowadays most of the English universities’ income arrives via student fees, instead of direct government grants. Half the money is released to them by the UK’s Student Loans Company each May, whereas costs for stuff like paying lecturers and keeping the lights on are spread out over the year; so things are often pretty tight by April.
This all creates an inherent imbalance in how cash flows in and out of the institutions, which isn’t helping to ease the pressure on the finances of England’s universities (with Brexit partly to blame). One unnamed establishment has already had to go cap in hand to the regulator, the Office for Students, for a temporary loan. If the universities’ latest published accounts are any guide, it won’t be the last. While large institutions have gone on a 12 billion-pound ($15.4 billion) borrowing binge, it’s the smaller, less well-funded ones we really need to worry about.
In an apparent effort to lift standards by fostering competition, English universities are free nowadays to recruit as many students as they can. As I’ve explained before, this process of turning higher education into a market-based business has created unhappy consequences, including massive pay-hikes for university bosses, easier admission requirements and rampant grade inflation. With each student representing about 28,000 pounds of potential income over a three-year course, there’s been an almighty battle to boost their numbers.
Hence universities are spending hundreds of millions of pounds on shiny new equipment, lecture halls and sports complexes, which the largest have financed in part by issuing long-duration public bonds at extraordinarily low yields. (Others have turned to private placements).
The trouble is, there aren’t enough students to go around right now. A British demographic dip doesn’t bode well for the overall undergraduate intake between now and 2021. Lower recruitment is doubly painful because it reduces rental income from student lodgings too. Meanwhile, Brexit will probably dry up EU research funding and put off European students. Wage inflation and giant pension deficits are another drag.
This perfect storm could get worse. The government has already put a stop to fees rising in line with inflation, and a review of university funding might result in the 9,250-pound maximum fee being slashed. Students would love that, but it’s not clear how universities would fill the funding gap. Unlike in the US, most British institutions don’t have big endowments — with two-thirds of the assets held by just eight institutions. Oxford and Cambridge are in no danger of going bust.
Bloomberg View
