What would happen if a UK university went bankrupt?

“I think what we’ve got to accept is that some universities may well go bust,” the Conservative MP and former home secretary Suella Braverman recently told the BBC’s Panorama. “They may well close. And I don’t think that’s necessarily a bad thing.”

Braverman will be a frontrunner for the Conservative leadership if, as seems highly likely, defeat in July's general election brings the ejection of Rishi Sunak. On Panorama, she was answering a question about the possible impact on UK universities if international student numbers dropped significantly as part of a big reduction in net migration – long the Tory party’s fervent, unfulfilled desire.

It was an instructive if chilling response, underlining the fact that for some Tory MPs and right-wing commentators, a university “going bust” would be a good thing, offering a necessary corrective to decades in which both immigration and the higher education sector have grown too big.

The government’s attitude was emphasised in a recent speech by its “minister for common sense”, Esther McVey, who reacted to fears that crackdowns on international student visas were stretching university finances by saying: “I have no sympathy. For too long, these universities have been selling immigration to international students rather than education, and the [prime minister] has been right to put a stop to that.”

The Conservatives underlined their indifference to universities’ financial plight by announcing last week that, if re-elected, they would pass a law permitting the Office for Students to close “rip-off” courses with high dropout rates, low job progression and low earnings potential. The party estimated that it could save nearly £900 million this way, which it would use to create 100,000 new apprenticeships. The Conservative-supporting Daily Mail said this could amount to one in eight courses being closed, currently taken by 130,000 students.

The Labour Party described the plan as “laughable”, but the party has made no announcements on university funding and, on the ground in the sector, and especially in England, there is a growing fear that Braverman and her ilk could get their wish regardless of the election result. The sense of crisis around university finances is growing as the impact of the long-running freeze in the fee cap is exacerbated by high inflation and signs of falling international recruitment amid tightened visa policy.

That is all causing ever greater nervousness among university governors, responsible for judging the financial forecasts and determining whether their institution can be signed off as a going concern able to meet its liabilities, including agreements with bank lenders about financial performance.

John Rushforth, executive secretary of the Committee of University Chairs, which represents heads of UK governing bodies, has “no doubt there is a significant risk we are going to have somebody go over the edge at some point if nothing changes in the next couple of years”. And the former Higher Education Funding Council for England chief auditor has heard “rumours about institutions talking to banks about potential breaches of covenants”.

The likes of Braverman may be unconcerned about such a prospect in the abstract, but there would clearly be huge implications for students, staff and, indeed, whole towns – not to mention local and national politicians – if universities really did start to “go bust”. But what, exactly, would those consequences be? Where would the students go, for instance? Would staff be likely to receive any payoff, or would creditors get first dibs on any asset sales? And how would the collapse of a university affect the rest of the sector?

The honest answer is that it’s hard to say exactly what would happen if a UK university did go bankrupt because it has never actually happened. The closest a UK higher education institution has come to catastrophe was arguably when, in 1987, the then University College Cardiff (UCC) was plunged into financial crisis by the Thatcher government’s dramatic cuts to university funding. However, despite an early feeling that Thatcher wanted to “make an example” of UCC and let it sink, the crisis actually prompted a major intervention from the Department of Education and Science, which injected about £20 million and called in a team to sort out the mess.

One of those helpers, David Palfreyman, explains that the injection of government funding avoided insolvency and eradicated the UCC’s deficit “so that the adjacent, well-managed” University of Wales Institute of Technology “could take over UCC, creating Cardiff University”.

That case also tells us something about the reality of the political pressures, rather than the rhetoric, when a university gets close to collapse. Palfreyman, who is now bursar of New College, Oxford and director of the Oxford Centre for Higher Education Policy Studies, notes that there was a general election coming in 1987 and “there were, as it happened, two marginal seats” in the Cardiff region – something that may well have figured in the government’s decision to intervene.

There has also been a recent case of an English higher education provider ceasing to trade: the for-profit GSM London, which announced in July 2019 that it had entered administration and would stop teaching at the end of September that year. That left about 3,500 students – many of them mature students from disadvantaged backgrounds, with work and family obligations – facing transfer to different institutions to continue their studies, for which they had typically taken out publicly funded student loans.

It’s worth noting that while ministers were saying in public that they would never “bail out universities”, behind the scenes the Department for Education allowed GSM London to continue to access public funding despite officials knowing about its serious financial problems. The fact that £152 million of such funding, via student loans, had gone into GSM London in the six years to 2017-18 may have figured in the government’s thinking.

So how might a university tip into insolvency today?

There are “three actors that are most likely to force the cessation of a university”, says Bob Rabone, a former University of Sheffield finance director and former chair of the British Universities Finance Directors Group. Those are the Office for Students, a bank lender or HM Revenue and Customs (over unpaid taxes) – “probably in that order”.

In the event of a “lengthy period of financial distress” at a university, Rabone continues, the OfS “may have a mandate to intervene because of the impact on students…albeit not necessarily directly triggering an insolvency process, but [introducing mechanisms] which could quickly stop a university’s activities”.

One example might be removing the university from the OfS register, thereby removing its students’ access to student loans. Many lenders “will have trigger conditions in the event of a withdrawal of OfS registration… so they would then commence a recovery process”, Rabone adds. Banks also have “trigger metrics” in their lending covenants, covering aspects such as operating surplus relative to interest costs, but would probably “first seek a planned improvement in financial performance” before taking the step of triggering insolvency.

An organisation’s assets “will always realise less if the business is actually insolvent and is only continuing under a receivership/insolvency process”, Rabone points out. “Avoiding this, if possible, will be the preferred path for HMRC or a funder.”

Another unknown, of course, is whether the government or its agencies would, once again, come up with some kind of rescue package, rather than allow the institution to go to the wall. But a lot has changed in terms of how UK higher education runs since the 1987 Cardiff crisis. The University Grants Committee gave way to the funding councils of the four UK nations, while the Higher Education Funding Council for England (Hefce) was itself succeeded in 2018 by the OfS – a market regulator whose founding chair, Sir Michael Barber, loudly made clear that it would not “bail out” providers in financial trouble. That is a reflection of the intent with which the OfS was set up by Conservative former universities minister Lord Johnson, who argued that “market exit” was a necessary part of a functioning market, and there should be a regime to deal with that.

The OfS does require that all institutions registered with it have a “student protection plan”, setting out “what students can expect to happen should a course, campus, or institution close”, to ensure that they “can continue and complete their studies, or can be compensated if this is not possible”. However, for Palfreyman, co-author of The Law of Higher Education, the problem is that these provisions “just do not work” because the assets needed to fund things like breach-of-contract compensation or the teaching-out of courses “can’t be ring-fenced within the insolvency regime”. So “the students are merely one among all the other creditors, as for any insolvent business” – and probably behind lenders in the queue for access to the proceeds of any sale of university assets.

This is also a big concern for Ben Elger, chief executive at the Office of the Independent Adjudicator for Higher Education (OIA), the independent student complaints scheme for England and Wales. GSM’s entry into administration brought home “how vulnerable students are, or would be, in a situation where a university or provider went under and there was really no money in the system” to support them, says Elger. As a small organisation, the OIA could be swamped by student complaints in such a scenario.

Elger points out that the Technical and Further Education Act 2017 established a special administration regime for further education colleges. This allows an administrator to take control of an FE college, with a mandate to prioritise the interests of existing students above creditors. The creation of a similar framework for higher education is one possible way to address the peril of university students being left high and dry, he thinks.

A second option would be “some kind of sector-wide insurance scheme that would assist in these situations in terms of compensating students”, Elger suggests, while a third would be a more general pot that the sectors paid into, which could be used in various ways, including supporting students in transferring to other institutions to complete their courses.

“All three options are things I feel we should be looking at now,” says Elger, who wants to work with others in the sector to move reform ideas forward. “Because it does feel like it’s only going to be a matter of time before we have another [market] exit: possibly quite a disorderly exit.”

If transferring students was deemed the best response to insolvency, neighbouring universities would be the obvious institutions to pick up the slack. The problem, particularly within big cities, is that often those are very different kinds of institution in terms of students, courses and entry tariffs. So, in practice, thousands of students might have to be transferred further afield, imposing additional costs and running into the problem that some may not be willing or able to make such a move. The complexities of individual circumstances for students mean “you can’t just do block transfers”, says the Committee of University Chairs’ Rushforth; working around that would make transferring students “a massive task”.

For staff, meanwhile, a university collapse would mean thousands losing their jobs – and trying to find new ones in a labour market where redundancies are currently much more numerous than job offers. Tricky problems would also be raised about pension liabilities in local government pension schemes (mostly used by post-92 institutions) and the Universities Superannuation Scheme.

Plus, there would be wider economic impact on towns and cities. Andy Westwood, professor of government practice at the University of Manchester, sees a university going bust, in the current financial and regulatory environment, as “the inevitable end scenario of the culture war” that some on the Conservative Party have been waging against universities: a “fair and desirable price to pay” for the furtherance of their political agenda. “But none of these [politicians] pay much or any regard to ‘place’ or to the potential impact on local areas or economies,” continues Westwood, a former adviser on skills and universities in the last Labour government. This amounts to a “major gap” in thinking because “as we know and [as acknowledged by] the government’s own levelling-up agenda, the UK has some of the highest levels of regional inequality in the OECD”.

That is why, despite the apparent insouciance currently on show, “in practice, any institutional failure will test government’s resolve…as well as the particular individual stance of local politicians, be they MPs, ministers or mayors”, Westwood predicts.

As one example of one aspect of the economic role higher education institutions play in their cities, Sheffield Hallam University, one of the larger post-92s, has about 4,500 staff. The University of Sheffield, one of the larger Russell Group universities, employs around 8,200. The Sheffield steel industry, which once dominated the city, employs fewer than 3,000.

“In lots of towns and cities, universities are the biggest employer after the NHS” – and provide “quality jobs”, observes Vivienne Stern, chief executive of Universities UK. “You start to think [handling the consequences of a university insolvency] is not just about managing a group of students part-way through their course who might need to find a place to complete their programmes – which in itself would be pretty hair-raising if you were dealing with 20,000-odd students. It’s all the other things a university does that are important. It’s all the jobs that depend on a university…the taxi drivers, the shops, the hotels, the hairdressers – all of the people that flock to a place because there’s a university there.”

Returning to Braverman’s relaxed attitude to the prospect of university failures, it’s worth noting that she is the sitting MP for Fareham in Hampshire and is standing for the redrawn constituency of Fareham and Waterlooville, just north-west of Portsmouth. It’s a safe bet that Braverman’s constituents include students and staff from the University of Southampton, Southampton Solent University and the University of Portsmouth. What would her local economy look like without the money they spend there? What would constituents think of an MP who was happy to stand by while the plug was pulled on all that – not to mention on local educational opportunity?

Hence, like Westwood, Stern’s hunch is that “if you laid that in front of Suella Braverman and talked about actual places – not some hypothetical university – you would get a different response”.

Even for many university leaders, there might currently be a temptation to think that another institution going bust is no concern of theirs if their own finances are relatively secure. However, the OIA’s Elger urges vice-chancellors “to think of the interconnectivity of the whole sector, the health of the whole sector, the reputation of the whole sector”, adding: “I think this is an issue for us all.”

Rushforth says there would be “a very real risk of contagion” across sector finances if a university did collapse. One reason is that there has been “a general expectation in the finance community that universities don’t go bust. If one does, I think the banks will look at all their lending arrangements to all institutions.” That would mean that “capital investment will become more expensive” for universities, and banks will be “more risk averse” in their lending to universities.

Rabone is more sanguine, observing that “lenders simply cannot unilaterally change their prices and immediately apply them”. So even a “major failure” would only prompt lenders to “reconsider their margins” for new borrowing and overdraft renewals.

However, it might be harder to avoid what Rushforth calls “the contagion effect on student demand”. A university collapse, he fears, would prompt would-be students to worry that any institution they enrolled at might collapse too. And they might conclude, therefore, that the investment was not worth it; even if the collapse occurred after they graduated, the value of their degree would decline significantly if the issuing institution no longer existed.

Such thinking could be particularly prominent among international students, who would be told by overseas competitors: “You don’t want to go to the UK because their system is falling to bits,” Rushforth says. This could “push other institutions nearer the edge”.

It is clear that a university collapse would leave behind a complicated mess. In England, the OfS would be on the front line for the clear-up, but, ultimately, it is the Department for Education that would most likely be held popularly accountable for what would undoubtedly be headline news across the country. Little wonder, then, that senior civil servants at the DfE (which declined to offer any comment for this piece) are said to have had conversations with sector figures aimed at understanding the range of impacts that a university collapse would have.

“I don’t actually think at the senior civil servant-level people think that [a university going bust] is an outcome anybody would want,” UUK’s Stern says. “There’s also an appreciation that if it happened, the costs of dealing with the fallout would probably be so significant that you should be thinking very hard about how you stop it happening in the first place.”

She also stresses that “universities are not standing there watching things get worse and doing nothing”. Rather, the sector is “trying very hard to get its house in order”, and she is “deeply hopeful we never get to find out what happens when a big university goes bust”.

Palfreyman is “unconvinced by panic in the sector about looming insolvencies”, highlighting that funding cuts were even more acute in the 1980s without (quite) bringing about a university collapse. Nevertheless, he thinks “there will need to be a change in insolvency law so that assets [of a collapsing university] can be secured against a government cash loan or, more likely, a commercial loan used to fund the compensation [or] teach-out, with the loan then paid off from the eventual sale of such assets”.

Rushforth, though, thinks that ministers should be “coming up with a plan to stop [insolvency] happening” in the first place. “They should walk away from this rhetoric [that] ‘we will not bail out institutions’,” he says. “Nobody’s asking to be bailed out. Hefce never bailed out an institution: it helped people sort themselves out under strict conditions. What [officials] should be doing now is planning for the sorts of scenarios I’m talking about; they should be thinking about where they would get the expertise to manage this.”

Ultimately, in England, that would mean government working to find a long-term solution on university funding. Stern has been advocating the indexing of the tuition fee cap to inflation (it has been frozen at £9,250 since 2017) as the most immediate solution, and Rushforth agrees that “some form of indexing for the unit of resource” is required, alongside addressing VAT barriers that hinder universities from saving costs through shared services.

But the risk is that current policy trajectory on immigration is only likely to make the situation worse. The government may have ultimately decided against abolishing the graduate route post-study work visa after the Migration Advisory Committee found no widespread abuse, but previous changes to visa policy, particularly the ban on master’s students bringing family members to the UK as of January this year, has already had a big effect, with the number of sponsored study visas down 44 per cent in the first three months of 2024, compared with the same period last year. And with Labour anxious to project itself as equally tough on immigration, a Labour government would seem unlikely to reverse those changes. UUK warned recently that a survey it conducted of 73 universities revealed a “significant decline” in overseas enrolments, particularly at taught postgraduate level, whose numbers were already 44 per cent down in January, year-on-year.

In addition, UUK recently commissioned research by accountancy firm PwC – very much with the aim of reaching ears in government – which looked at 70 university financial returns and found that 40 per cent of providers were projecting to be in deficit in 2023-24. Most were expecting increased income in the years ahead, partly because of projections of continued international expansion, but the analysis also found that a 5 percentage point fall in international enrolments would put 51 per cent of universities in the red in 2024-25, while a 20 percentage point fall would leave four-fifths in deficit.

On the view in sections of the Conservative Party that a university failure is “one way you could roll the clock back” on higher education expansion, Rushforth, stressing that this is not his view, says: “If that’s a political belief you hold to be true, then for the sake of students – never mind the institutions – make it a planned reduction.”

The prospect of a university bankruptcy is included in a "shit list" of scenarios that could derail an incoming Labour government, reportedly drawn up by Labour's chief of staff, Sue Gray, alongside local council insolvency, public sector pay pressure and the collapse of Thames Water. Westwood agrees that the prospect of a university going bust is “a big challenge for the next government as the current funding and regulatory system looks unlikely to remain intact without major reforms by the end of the next Parliament. And while the instinct of a Labour government might be to intervene and prevent such an eventuality, it will still need to work out what it really wants from universities in order to work out what exactly to save.”

Thinking about what would happen if a university went bust highlights the gaps in protections for students that need addressing, but also the complexity of problems that would be generated on multiple fronts, responding to which would consume huge amounts of ministers’ and officials’ attention.

The starting point in the discussion, says Rushforth, should be that a university bankruptcy “would be an absolute disaster: for the sector, for the students, for the area, for the general reputation of UK HE”. However, persuading all shades of political opinion to accept that fact and, more importantly, to act on it, is not something on which vice-chancellors, finance directors and trustees would be wise to bet the boardroom silver.