What happens if a university goes bust?

Governments face difficult choices when industries fail. They can stand by while private businesses collapse and see the resulting loss of jobs and revenue. Or they can step in and use public money to prop up these firms.

The Scottish government intervened in 2019 to rescue Ferguson Marine, the last shipbuilding firm on the river Clyde, but faces ongoing controversy on whether it broke state aid rules in doing so. And, of course, the global financial crisis of 2008 saw the UK government intervening to rescue banks such as RBS that were seen as “too big to fail”.

A similar financial crisis may be looming in higher education, a sector worth billions each year to the UK economy and a source of great national pride.

The UK boasts the second-largest collection of Nobel laureates and four of the world’s top-20 universities. But all is not well in higher education.

Financial woes

The most recent data from the Higher Education Statistics Agency for the financial year ending in 2022 shows that (excluding pension adjustments, which can skew accounts for particular years) 24% of UK universities reported a deficit.

The Russell Group, which represents an elite group of research-intensive universities, claims it faces an average shortfall of £2,500 on every home undergraduate taught, and that this could grow to £5,000 by 2029-2030.

The outgoing vice-chancellor of Sheffield Hallam University, Sir Chris Husbands, recently suggested that calls to increase fee levels could be perceived as being tone deaf. Faced with their core undergraduate activities being unprofitable, universities have diversified their income by recruiting more international students, despite UK immigration policy limiting their ability to do so.

With no immediate prospect of increased funding either from government or through increased fee levels for domestic students, such restrictions on international recruitment together with damaging rhetoric from the government about so-called “rip-off degrees” means it is no longer unthinkable that a UK university might fail.

To consider what might happen if a university went out of business, we can look at what transpires when other businesses – such as banks – go bust.

Of the brand names that collapsed during the 2008 global financial crisis, few will remember the Heritable Bank. It held 22,000 accounts, making it comparable to the number of students at a mid-size university.

The cost to UK taxpayers of rescuing the Heritable Bank was £500m. The government, via the Financial Services Compensation Scheme, paid compensation to Heritable’s customers and, while some of these monies were recouped, the upfront costs were significant and the endgame did not see all of the cost recovered.

Part of the solution when Heritable failed was that another provider, ING, took on its customers. Were a university to become insolvent, thousands of students would find themselves marooned part-way through a degree programme, with no obvious route to complete it. There is no guarantee that another university would want to absorb a collection of “new” students, especially at fee levels that are already acknowledged to be below the break-even point.

Consequences for students

Even if a neighbouring university was given incentives to step in by the government, there would be practical issues to consider. Despite a potential merger under consideration in Australia, there is little history of mergers between universities in the UK.

The government could step in to avert a crisis. However, compared with the crisis in financial services in 2008, there is no equivalent compensation scheme in place and the public finances are in poorer health. In combination, this means there is no certainty of a government rescue package – and there may be a real reluctance to interfere in the market.

Almost inevitably, a series of messy class action lawsuits would result, with students seeking recompense for fees paid, perhaps over multiple years, that did not result in the qualification advertised. Worse, the shockwaves felt in one university could easily rock confidence in others. Future students might become more interested in the annual financial reports of a prospective university than its traditional prospectus.

Pulling down communities

Beyond the students, there would be significant economic consequences for the region, town or city concerned. Universities are typically large employers, sometimes the biggest in the area, and often refer to themselves as “anchor institutions” – central to the local economic ecosystem in the same way that a household-name retailer might be key to the viability of a shopping mall.

Yet anchors can also drag. In the case of a university failure, the potential for large numbers of high-skilled roles to disappear would be matched by a set of economic ripples that would be felt more widely.

This could range from housing, hospitality and retail being starved of income, to these and many other sectors suffering a shortage of a part-time, flexible workers. There are 142 members of Universities UK, and the 130 universities operating in England are estimated to contribute £95bn to the economy each year. Somewhere between £0.5bn and £1bn is a reasonable estimate of the amount attributable to any one university.

Finally, there would be political consequences. Electorates, of course, comprise many current, past and future students. Accusations would follow that jobs, qualifications and potential futures had been squandered.

The university sector is not immune to the kind of industrial or technological revolutions that have swept through other industries. But neither is it a purely commercial sector. Some of our policymakers and regulators might regard a university failure as an indication that the market is working. If so, they should be careful what they wish for.

Robert MacIntosh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.