Universities’ reliance on overseas student fees to fund teaching and research leaves them at financial risk, according to a new report.

The report from the Commons’ Public Accounts Committee also finds that the proportion of universities with an in-year deficit has increased in every one of the past four years, from 5% in 2015/16 to 32% in 2019/20.

It adds that some universities are “heavily reliant” on income from overseas students to subsidise their research, which could leave them exposed to financial risk if assumptions about future numbers of international students prove to be optimistic.

The report says that universities survived the pandemic because of financial assistance from the Government, the resilience of individual providers, the fact that no large-scale refunds of tuition fees were needed and the lack of any interruption to fees from international students, as had been feared.

But it adds that ongoing financial pressures could mean universities are at risk of failing, closing campuses and courses or reducing teaching quality.

The PAC said protections for students needed to be strengthened, and that it was concerned that student satisfaction had fallen in recent years, with 54% of students reporting that their course was not good value for money in 2021.

The committee warned that the Office for Students had not made “sufficient progress” on getting a grip over long-term challenges facing the sector, such as pension fund deficits, inflation, rising costs, a freeze on the student fees cap and the impact of policy reforms such as minimum entry requirements for student loans.

The PAC added that the Department for Education was not holding the OfS to account over the financial health of the sector, with 80 institutions currently in financial deficit (32% of all universities), 17 of these having been in deficit for the past two years, while 20 for three years or more.

MPs also said that the DfE needed to create a set of robust performance measures including feedback from universities to hold the OfS to account for its work.

It said protections for students were “not strong enough” in the event of universities facing financial distress.

While universities must have a student protection plan in place to address how financial risks could impact on students, the report says that the OfS approved a “number of student protection plans that it considered inadequate” so as to not delay registrations.

It adds that the OfS needs to make sure all student protection plans are “fit for purpose” and “sufficiently clear” for students so they can make informed decisions.

The PAC said that the financial stability of some universities was being put at risk by their “heavy dependence” on being able to grow student numbers from overseas, including to subsidise their teaching and research.

It says that in 2019/20 there were over 340,000 overseas students at English universities, nearly half of whom came from China or India, with many institutions’ financial forecasts assuming growth in these numbers in the future.

These have previously been found by the OfS to be overly optimistic, the report said, while an over-reliance on international students could conflict with Home Office plans to control migration and the UK’s “wider geopolitical interests”.

The report added that the DfE had “failed to adequately assess” current and future financial impacts on universities because of the awarding of teacher-assessed A-level grades during the pandemic, leading to “substantial grade inflation” in 2020 and 2021.

This meant more students could take up places at higher-tariff universities but left other institutions under-subscribed with a loss of fee income.

The PAC said that the the Department and the OfS should review the financial impacts on providers of changes to the number and profile of domestic students over the short, medium and longer terms.

Susan Lapworth, interim chief executive of the OfS, said: “We welcome the committee’s focus on the financial sustainability of the higher education system, and will carefully consider its recommendations, building on the action we are already taking.

“In the main, universities and other higher education providers entered the pandemic in good financial shape, and there is evidence that the sector in aggregate is well placed to recover from the challenges of the last two years.

“There will, of course, be variation in financial performance between individual universities, and it is important to remember that each institution is responsible for its own sustainability.

“If any higher education provider registered with the OfS runs into financial difficulties, the OfS will take steps to protect students.”

A Department for Education spokesperson said: “Despite the challenges faced by universities and colleges in recent years, the most recent reports from both the NAO and the OfS make clear that overall, the sector remains financially resilient.

“Higher education is a key part of our skills revolution, which is why we have set out reforms to boost the sustainability of our world-class higher education system, including ensuring the student loan system is fairer for both students and taxpayers.”