Three in four England universities expected to be in the red next year

England’s universities face financial turmoil with nearly three in four expected to be in the red next year, according to gloomy forecasts from the higher education regulator.

The Office for Students (OfS) said the sector would have to take “bold and transformative action” to compensate for a £3.4bn drop in income forecast for 2025-26, with universities needing to consider mergers or cost sharing.

Sir David Behan, the OfS chair, said universities would need to collaborate more, such as not duplicating courses taught at nearby institutions.

“It doesn’t make sense for universities in the same city – or the same region – to compete in terms of the courses being offered,” Behan told the BBC.

The government’s decision to raise tuition fees for domestic undergraduates by £285 to £9,535 next yearwould add £371m while higher national insurance payments would subtract £430m.

Related: University fees in England to rise next autumn for first time in eight years

Jo Grady, the general secretary of the University and College Union, said: “The tuition fee increase announced last week will not stop the rot. Labour now urgently needs to set out how it will put the sector on a sustainable footing by providing long-term public funding.”

Susan Lapworth, the OfS chief executive, said the report on the financial sustainability of universities starkly illustrated the challenges they face.

“I know that institutions are acutely aware of these risks and are striving to address them. A competitive recruitment market for UK students means some universities will lose out and will need to update their plans. And all institutions will be alive to the impact of a sharp reduction in visa applications for international students,” Lapworth said.

Bridget Phillipson, the education secretary, said: “This report shows exactly why the increase to tuition fees and the package of reforms I announced last week were so essential. The dire situation we inherited has meant this government must take tough decisions to put universities on a firmer financial footing, so they can deliver more opportunity for students and growth for our economy.

“I asked the Office for Student to refocus their efforts on monitoring financial sustainability in the summer. These findings show why that was needed, and why universities must do more to make their finances work.”

Figures published by the Home Office on Thursday show a 16% fall in the number of study visas issued this year, compared with the same period in 2023, while the OfS said UK undergraduate numbers were likely to be “significantly below” expectations.

Laporth said: “Our modelling estimates the financial challenge ahead for providers and it does not conclude that significant numbers of universities will close in the short term. But that does not mean that institutions can rely on student recruitment rebounding in the coming years.”

The OfS report shows larger research-intensive universities, such as those belonging to the Russell Group, have continued to grow at the expense of smaller institutions or those that rely on teaching income.

The regulator’s modelling suggests 72% of higher education providers could be in deficit by 2025-26, while 40% would have fewer than 30 days’ worth of cash on hand.

“We know that this picture will be of significant concern to universities and colleges, as well as to their students,” the OfS concluded.

Nick Hillman, the director of the Higher Education Policy Institute, said: “It’s often said that universities have been exaggerating the scale of their financial woes. These numbers prove the opposite. In other words, universities’ predictions have been too optimistic and reality is now starting to bite.

“We will struggle to claim the UK still has a world-class higher education system if over 100 institutions come to have less than 30 days’ liquidity. Next year’s spending review could even be make or break for some.”

Vivienne Stern, the chief executive of the Universities UK group representing vice-chancellors, said: “This country needs its universities to be firing on cylinders if we are going to get the economy growing and improve public services. But this new analysis from the OfS shows the scale of the challenge. It is a source of serious concern. Universities in all four nations of the UK are in an extremely difficult position.”