Under pressure: COVID-19 and the funding of European higher education

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Three little pigs Three little pigs

Once upon a time there were three little pigs. Each built a house: one from straw, one from sticks, and one from bricks. One day, the big bad wolf came to eat the little pigs. He blew the first house down, then the second house.  But he couldn’t blow the third house down, and the little pigs survived. 

Fast forward to 2020. The wolf threatening European and international higher education is the coronavirus (COVID-19). Institutions are closed, struggling to put together online learning on short notice and to keep their students virtually close while few if any remain on campus. The little pigs look at each other and wonder: which house is going to survive? 

The “houses” we’re talking about are the financial foundations of European higher education systems. To simplify, there are three basic models: the privately funded one (“the house of the market”), the publicly funded one (“the house of public good”), and “the house with a diversified base.” While the wolf is making his way through the village, which houses will he blow down?

The house of the market

Let’s start with an archetypical “house of the market,” which is mostly funded privately but still relies heavily on state funds: the UK model. With about half its funding coming from private sources (and a sizable chunk from EU sources) in recent years, this house looks particularly vulnerable now. Looking exclusively at 2019/20 impacts and the case of 2020/21 international student fees, Universities UK initially calculated a £6.9 billion fallout from private funds. Later, more conservative calculations put the emerging “black hole” at £2.5 billion. In early May, the government announced that there wouldn’t be a multibillion-pound bailout for universities and instead allowed institutions to charge full tuition fees during the lockdown, while universities will be able to enroll up to 5 percent more students. This has not only angered students and their organizations; around one fifth of potential applicants are reconsidering their plans to enter higher education.

International students, who are charged significantly higher fees, also play a crucial role. They go to the United Kingdom to learn, but also for the developmental and social experience. If you subtract this and the university isn’t a brand recognized around the world, is the residual sufficient to attract students? In the UK, like in the United States, elite institutions will be able to fill the open spots from waiting lists and lower-tier institutions. But this option won’t be available for all institutions, and the pressure on lower-tier institutions will be enormous. If you base your university funding on markets, of course you become vulnerable to market developments. For many years, it was a highly attractive option to see higher education as a globally tradable good you could sell to foreign and especially overseas students at high prices. Many universities relied heavily on such income to cross-subsidize other activities. It might continue to work for the happy few with top reputations, but for many other institutions the house built with straw might break down because of COVID-19.

The house of the public good

The house of the public good is still standing, seemingly benefiting from the fact that it resisted the temptations of the market, based on the strong belief that higher education should be financed from public budgets. In some European countries, the idea has prevailed that studying should indeed be “free,” for domestic students as well as those from abroad (de facto shifting the costs of higher education from those who benefit most to all taxpayers).  In Germany, the public share of university funding is 86 percent, there are no tuition fees for German students, and people from outside Europe pay a small tuition in only one of the 16 states. Similarly, in Finland, public funding covers roughly 92 percent of institutional expenditure, with education free of charge for domestic and EU students. Even though universities can charge fees to foreign students, the net revenue from fees has so far been insignificant.

The Finnish and the German cases illustrate why the house of the public good is currently still standing: in the short run, there seems to be no limit on public spending and public debt during the crisis. Politicians now see their mission as saving all industries and groups suffering from the crisis, providing packages with billions of euros. There is high sensitivity to the problems it would cause if educational institutions are not able to do their job. The universities don’t have to face cutbacks; the public sources just keep on bubbling. Some German states even decided on additional funding: Hesse, for example, added almost 40 million euros to universities’ budgets in March, and in April invested more than 110 million euros in digitalization. In Finland, the government is preparing to offer universities additional funding to expand annual enrollment. With public funds cushioning universities from external impacts, they seem comfortably independent from developments in the market. Public universities in these countries keep going, with online teaching but no major revision of plans for financial reasons.  

So, can the “public good little pig” stay safe in its stable house? Definitely not, since it is most likely the next to be shattered or even blown away, although with some delay. Public budgets are running into enormous deficits, and cutbacks will eventually come. In Germany, in 1995, 80 percent of university funds came from public funding; 20 years later it was only 50 percent. There wasn’t a replacement by private income; rather, state and federal governments largely increased competitive program funding. Public programs have a limited time horizon; they are the first to expire if budgets are in fiscal stress, with dire consequences for academic staff employed under these programs. Universities will soon compete with schools for scarce funding in the education sector, with the public more aware of the challenges facing schools. In Finland, there seems to be a political commitment to keep at least current levels of funding, but it is likely that higher education will not escape austerity measures forever, whatever form they take. 

Therefore, future cutbacks can and will be done quite easily. A house built almost exclusively on public funds will stand a bit longer, but is not really able to protect the little pigs in the long run.

The house with a diversified base: the way forward?

The COVID-19 crisis offers many lessons for higher education. One is that no monolithic funding system protects universities, academics, and students in a crisis. As the examples have shown, private as well as public funding systems suffer sooner or later, though in different ways. But having multiple funding sources can spread the risks. Higher education needs to learn from the risk-diversification strategies of investors and not put all eggs in one basket, so that the sector becomes more innovative in its use of funding instruments. 

This leads to a few recommendations to governments on how to build a robust brick house. First, the erosion of public funding of higher education, combined with reliance on market income, is a highly problematic strategy, putting the sector at risk. Budgets for tertiary education will need to be protected going forward. The sector will continue to make a key contribution to countries’ economic development; this is not going to change due to COVID-19. Thus, maintaining a dynamic and equitable higher education sector should remain high on the agenda for European governments. A solid and reliable public funding base is complementary, not contradictory to entrepreneurial universities looking for market revenues. 

Second, governments should diversify the funding base with clever public stimuli and incentive systems. A good example is Sweden: 6,000 short-term “summer school” study places at universities will be created this year with additional government funding, to stimulate lifelong learning and employability for Swedish workers who are endangered by the crisis. The Netherlands has been using “innovation vouchers” for many years: small and medium-sized enterprises can pay for knowledge transfers they receive from higher education institutions using publicly funded vouchers. Innovations from such collaborations will be highly relevant to recovery from the crisis. They could be important bricks for building a stable house.

Third, the crisis is a good moment to reconsider the viability of higher education systems that are exclusively (or almost exclusively) publicly funded. Have they reached their full potential in terms of quality of teaching and research as well as international competitiveness? Has this model created a more equitable tertiary education sector? Or was it simply the most convenient solution to maintain peace and quiet at home? If the latter, is this a luxury that countries will still be able to afford? International experience shows that fees alone cannot raise quality, but they can be introduced in an equitable way, for example, in combination with income-contingent loan models.
But introducing old medicines to treat new diseases is far from easy in the “houses of public good.” In Finland, an expert report on COVID recovery strategy recently proposed introducing tuition fees for domestic students. It was hardly a surprise that the proposal met a political and public outcry, and the Minister of Science and Culture decisively shot down the proposal immediately after the report was published. The case was closed even before it was really opened.

Diversification of financial sources requires not only that governments allow and support related options, but also requires adequate institutional management. It means focusing more on strategic and risk management. Institutions must assess their sources according to the probability and volume of potential losses and create strategies to mitigate these risks. 
It might thus depend on the strength and persistence of huffing and puffing by the big bad wolf whether governments and higher education institutions are able to learn the lessons from the crisis of 2020.


Nina Arnhold

Global Lead for Tertiary Education and Lead Education Specialist

Frank Ziegele

Executive Director Centre for Higher Education, Gütersloh

Jussi Kivistö

Professor of Higher Education Management, Tampere University, Finland

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