This one action could help cash-strapped universities without costing taxpayers a penny

Following this year’s Office for Students (OfS) report on the financial stability of the higher education sector and the news that many UK universities are facing low and declining levels of cash at key points in their annual cycle, Professor John Latham CBE, Vice-Chancellor of Coventry University and Group CEO, breaks down what this means and how the government can change the profile of Student Loan Company (SLC) payments to support vulnerable higher education institutions.

The situation today

Universities up and down the country are facing serious financial challenges, with most institutions looking at how to reduce costs and generate sufficient income for short-term stability and long-term sustainability.

One of the many reasons behind the economic insecurity in our sector is the current profile of payments made by the Student Loan Company. Student loans are the single biggest source of income for many institutions, and the current approach to payments is based on a traditional three-term/semester model and structured using a 25:25:50 ratio. This model is founded on the belief that the first two semesters are focused on teaching and operations with the third dedicated to assessment.

On paper, this model makes sense – the theory says that SLC payments to universities are staggered throughout the year to ensure effective coverage of outgoing costs. With the first two semesters being more compact, less money is received, before a bulk payment is made in Semester 3 to cover costs for the rest of the year.

However, there is a problem. The first two semesters – those focused on teaching and operations – are significantly more cost intensive and it is months after the work has been done that payment is made, leaving universities constantly in arrears. It should be noted that the costs of permanent staff and running campuses are incurred evenly across the year and do not fit the current SLC payment profile.

A separate system is in place for apprenticeship payments, which are often managed through the Apprenticeship Levy. These are not subject to the SLC model and are paid evenly in instalments across the year.

The current approach essentially means that students funded through the SLC pay for their tuition later and more unevenly than those paying through alternative systems, such as with apprenticeships. While the SLC model has evolved since its establishment, institutions across the country have had to innovate and adapt to address the imbalance of cash expenditure and income through alternative routes, for example international student fees.

However, as the UK government’s visa and immigration policy has caused a collapse in international student fee income, the current structure of the SLC payment profile is forcing institutions to draw on their cash reserves to plug the gaps created by the government’s main funding route. This creates financial issues that can be removed by considering an alternative approach to SLC payments.

How can this be addressed, and why now?

This is important for several reasons. Firstly, universities face conditions of registration and covenants from lenders that require them to maintain a minimum cash level.

Secondly, we are no longer restricted to traditional student intakes. As widening participation and flexibility in delivery have become increasingly important, universities like ours have introduced multiple intakes in the year. This new model ensures we can attract more students from a wider range of backgrounds, helping to ensure we have a lasting positive impact within our communities. The current payment schedule is out of touch with how we have moved on.

That is why I, alongside other Vice-Chancellors, am calling for a shift in the current model, acknowledging that many universities would now greatly benefit from SLC financing spread across the year rather than the rigid three-semester system currently used.

This starts with the implementation of a new funding profile of 33:33:33, progressing to 40:40:20. This shift in approach will not increase overall costs and will only affect the budget for one year. After that, there would be no additional cost impact and no additional cost to the taxpayer.

The timing of this change is as important as the model itself. A decision now would help to improve the sector’s position and ensure a more equitable funding model for UK students, who are more likely to use the SLC route, and allow universities to use specific student income to meet the needs of those students. Even with the move being phased, first to 33:33:33 and then to 40:40:20, it would have an immediate impact on the current situation - one which has largely been created by government rhetoric and policy.

I have seen numerous proposals suggesting that universities could use short-term borrowing to overcome the shortfalls we face at the end of each year. This is simply not sustainable and would mean borrowing as a stopgap to meet immediate outgoings while awaiting SLC payments. A short-term win perhaps, but one which would see students’ fees being spent on interest payments and create inefficiency at a time when we are trying to improve efficiencies and cost-effectiveness.

It is also argued that the back-ended SLC payment profile motivates universities to ensure that students complete their studies. The OfS B conditions, however, are a far greater motivator for many institutions. These regulations have been put in place to safeguard the quality of higher education provision in the UK, and universities must comply in order to avoid the threat of fines or even deregistration. It should therefore come as no surprise that, when it comes to student experience and retention, the B conditions take precedent over the receipt of SLC payments.

Conclusion

What should be clear is that this isn’t a cry for more taxpayer money. In fact, this would cost the taxpayer nothing extra. Nor are these changes a cure for the financial issues facing the sector. This is about addressing the problem of low cash levels and ensuring institutions receive SLC payments when they need them – helping to ensure high standards of teaching and learning and making a small, cost-free contribution to safeguarding the future of universities that generate billions of pounds to the UK economy and support job creation and economic growth in communities across the UK.