A high reliance on international students is becoming increasingly risky for U.K. universities.  This is because heightened geopolitical uncertainty and changes to the U.K.'s immigration policy may affect overseas students' desire to study in the U.K. In turn, this may reduce U.K. universities' income from international tuition fees. The U.K. university sector is also facing pressures from restrictions on tuition fees for domestic students, elevated inflation, and the decarbonization agenda. S&P Global Ratings therefore expects the sector's financial headroom to shrink, although the extent of the impact will vary between universities.

What's Happening

We think that heightened geopolitical uncertainties, tighter restrictions on immigration, and growing competition from emerging-market institutions that are gaining recognition could reduce the number of international students studying in U.K. universities. Following a policy change, as of January 2024, most international students are not allowed to bring their dependents to the U.K. on their study visas, with discussions around post-study work visas ongoing. In our view, these measures may affect U.K. universities' competitive positions and make their business models increasingly risky.

Why It Matters

Over time, U.K. universities have been increasing their reliance on income from international students.   The tuition fees that international students pay rose to more than 20% of U.K. universities' total revenues in 2022-2023, more than doubling from 2009-2010. Tuition fees for international students are not regulated, while tuition fees for undergraduate domestic students are capped at £9,250 per year and have lost about 30% in real value since 2017.

Universities are therefore using international tuition fees to subsidize the cost of educating domestic students.   While we consider that recruiting international students helps attract talent to the country and diversifies student bodies, it makes the U.K. university sector's financial performance and student demand vulnerable to external factors and therefore volatile.

The pool of international students is exposed to changing political sentiment and economic instability.  This is because most international students come from emerging markets, traditionally China. Recently, we have also observed a growing dependence on students from lower-income regions such as Africa and South Asia.

We think that there are limited growth prospects among students from developed markets.   The EU student population has decreased significantly following Brexit due to new EU entrants no longer being considered domestic students, meaning they are charged the higher international tuition fees. Furthermore, most developed markets outside the EU have mature and well-respected higher education systems, implying that the potential to draw students from them is low.

International tuition fees are particularly volatile as enrolment is skewed toward postgraduate degrees.   These degrees are typically shorter than undergraduate degrees. Moreover, postgraduate students tend to bring dependents with them, and hence the latest restrictions on immigration may affect them more.

What Comes Next

In our view, most U.K. universities' credit quality will remain solid despite a potential reduction in the number of international students.   We expect the sector's financial performance to weaken and the universities to utilize the liquidity buffers that they have built up in recent years. We consider that research-intensive institutions with solid brand names will use their flexibility to maintain sound financials in the medium term. Equally, lower-ranked universities that focus on domestic students may see less of an impact, but will need to continue operating with tight margins due to the freeze on domestic undergraduate tuition fees and increasing costs.

In our view, lower-tier universities that depend on rapid growth in international students will be most affected.  In order to keep attracting international students, these universities have invested in infrastructure and accommodation. In a more challenging environment, these institutions may need to lower their entry requirements, thus potentially compromising the quality of their student base. They may also cut teaching positions and other costs, which may affect the quality of the education they provide.

We think that the impact on our rated portfolio is likely to be less pronounced.  Our rated universities do not belong to the group we consider the most vulnerable, and therefore do not expect an immediate impact on their creditworthiness. We nonetheless expect that their average operating margin will weaken to about 0.5% of operating expenses (opex) in the coming two years, from close to 5.0% in the prior three years. At the same time, we project that their debt burden will continue its gradual decline, with maximum annual debt service of just above 4% of opex by 2024-2025.

Related Research

• Research Update: Keele University 'A' Rating Affirmed; Outlook Stable, April 16, 2024
• Research Update: King's College London 'AA-' Ratings Affirmed; Outlook Stable, Jan. 17, 2024
• Outlook For Global Not-For-Profit Higher Education: Credit Quality Divergence Continues, Dec. 7, 2023
• Research Update: U.K.-Based Lancaster University 'A+' Rating Affirmed; Outlook Stable, Sept. 25, 2023
• Research Update: U.K.-Based University of Sheffield ‘A+’ Rating Affirmed; Outlook Positive, June 27, 2023
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