Summary
Introduction
Scotland’s approach to university funding has long been defined by its commitment to free tuition for domestic students, a policy that has become emblematic of the nation’s broader educational values. However, this model faces mounting pressures as universities navigate complex financial challenges, evolving student demographics, and increasing international competition. The tension between maintaining accessibility, ensuring educational quality, and achieving financial sustainability has intensified, prompting renewed debate about the future of university funding in Scotland. This article examines the current state of university funding in Scotland, identifies key challenges in the existing model, and explores potential solutions that could help balance the competing priorities of accessibility, quality, and financial sustainability.
Current State of the Sector
The Scottish Government’s budget for universities in Financial Year (FY) 2025-26 stands at £773.6 million, representing an increase of £12.9 million (1.7%) from FY 2024-25. This funding is distributed by the Scottish Funding Council (SFC), which announced its indicative allocations for Academic Year (AY) 2025-26 in April 2025. Total teaching funding allocated to universities has been set at £727.1 million, an increase of £12.9 million (1.8%) compared to the previous year, while the capital budget, including research and innovation funding, has been set at £368.3 million, an increase of £11.4 million (3.2%).
Despite these nominal increases, the funding landscape remains challenging. Based on the Treasury GDP deflator for 2025/26 at 2.65%, the 1.7% cash increase in the SFC’s resource budget represents a real-terms cut of 0.95% year-to-year. The situation appears even more challenging when measured against the Office for Budget Responsibility’s forecast for RPIx in Q3 of 2025 at 3.1%, which some argue better reflects the actual cost increases faced by universities.
The impact of these funding constraints is not evenly distributed across the sector. According to Universities Scotland, 17 of 19 higher education institutions will receive a real-terms cut to their teaching allocations, and 12 will experience a real-terms cut to their total allocations for teaching, research, and innovation funding.
The current funding model in Scotland differs significantly from that in England, where universities can charge domestic students up to £9,535 per year in tuition fees for the 2025/26 academic year. In Scotland, undergraduate tuition for Scottish-domiciled and EU students is funded directly by the government, with the SFC providing universities approximately £7,610 per student on average, according to Institute for Fiscal Studies estimates from 2023.
International student fees continue to be a crucial revenue stream for Scottish universities, with non-EU international students paying significantly higher fees than their domestic counterparts. However, recent changes to UK immigration policies have created uncertainty about the sustainability of this income source.
Research funding represents another vital component of university finances. The dual support system provides funding through both the Scottish Funding Council and UK Research and Innovation (UKRI). While the capital budget for research and innovation has seen a 3.2% increase in cash terms for 2025-26, concerns persist about Scotland’s ability to maintain its competitive position in research excellence without more substantial investment.
Challenges and Gaps in Policy
Financial Sustainability
The most pressing challenge facing Scotland’s university funding model is its long-term financial sustainability. Sir Paul Grice, Interim Convener of Universities Scotland, has highlighted that “the gap between the cost of teaching and the investment in each Scottish student remains unacceptably high” despite the recent cash increase. Universities Scotland had requested a 4% real-terms increase to the resource budget, significantly more than the 1.7% cash increase (0.95% real-terms cut) that was delivered.
This funding gap has eroded universities’ financial resilience over time. Professor Sir Peter Mathieson, Principal of the University of Edinburgh, warned in April 2025 that the
education system will “perish” unless there is an honest conversation about the future of free tuition. The University of Edinburgh announced the loss of 350 staff positions in early 2025, highlighting the financial pressures facing even Scotland’s most prestigious institutions.
A March 2025 report by the Carnegie Trust for the Universities of Scotland concluded that “the current funding model for universities in Scotland is not sustainable,” finding that almost half of Scottish adults (48%) would support the idea of charging university tuition fees under certain conditions.
Equity and Access
While Scotland’s free tuition policy is designed to promote educational access, questions have been raised about its effectiveness in addressing socioeconomic disparities. Research suggests that students from disadvantaged backgrounds in Scotland still face significant barriers to university participation, with the Higher Education Policy Institute (HEPI) describing the current system as “unfair” in a January 2025 publication.
The funding allocated to student support (as opposed to institutional funding) has not kept pace with living costs, potentially disadvantaging students from lower-income backgrounds who require more substantial maintenance support. This creates a situation where the absence of tuition fees may not be sufficient to ensure equitable access to higher education.
Furthermore, the current model has been criticized for effectively subsidizing students from more affluent backgrounds who might be able to contribute to the cost of their education, potentially at the expense of more targeted support for those from disadvantaged backgrounds.
International Competitiveness
Scottish universities operate in an increasingly competitive global environment, where their ability to attract talent and produce world-class research depends partly on adequate funding. The relatively modest increases in research funding raise concerns about Scotland’s capacity to maintain its strong international reputation for research excellence.
The financial constraints facing Scottish institutions may limit their ability to invest in cutting-edge facilities, attract and retain leading academics, and provide the enhanced student experience that international students increasingly expect. This could potentially undermine Scotland’s position in global university rankings and its attractiveness to international students and staff.
Demographic and Demand Changes
The SFC noted in its 2025-26 funding announcement that “the demand picture across Scotland is changing,” prompting a commitment to develop a shared understanding of the future shape and needs of the sector. Demographic projections suggest a decline in the number of 18-year-olds in Scotland in the coming years, followed by a subsequent increase, creating planning challenges for universities and funding bodies.
Additionally, the changing nature of work and increasing emphasis on lifelong learning may require more flexible funding models that support part-time study, micro-credentials, and returning learners. The current funding system, primarily designed around traditional full-time undergraduate degrees, may not adequately address these evolving needs.
Innovative Solutions and Approaches
Graduate Contribution Models
One approach gaining attention in the funding debate is the potential introduction of a graduate contribution model. Unlike up-front tuition fees, this would involve graduates making income-contingent contributions after they reach a certain earnings threshold. Proponents argue this could generate additional revenue for universities while maintaining the principle that no student should face financial barriers to entry.
The Higher Education Policy Institute suggested in January 2025 that Scotland’s student funding system “needs to be replaced with a graduate contribution model,” arguing that this would be more sustainable and equitable than the current approach. Such a model could be designed with progressive elements, ensuring that higher-earning graduates contribute more, while those who do not realize significant financial benefits from their degrees would contribute less or nothing.
Implementation could follow various designs, from a Scottish version of the English loan system to more innovative approaches such as a graduate tax or time-limited contributions. Any such system would need careful design to ensure it aligns with Scottish values around educational access while addressing financial sustainability concerns.
Strategic Differentiation and Collaboration
Another approach involves encouraging greater strategic differentiation and collaboration among institutions. Rather than all universities attempting to excel across all areas, institutions could focus on their distinctive strengths and form collaborative partnerships to deliver comprehensive educational offerings efficiently.
The SFC has indicated its intention to have individual discussions with each university about “the future shape and needs of the sector for the medium-term.” This process could lead to more strategic allocation of funding based on institutional specialization and regional needs.
Examples of this approach include the development of regional partnerships like the Edinburgh and South-East Scotland City Region Deal, which includes collaborative initiatives between universities, colleges, and industry partners. Such models can leverage economies of scale, reduce duplication, and create more sustainable financial models through shared resources and complementary offerings.
Diversified Revenue Streams
Scottish universities are increasingly exploring alternative revenue sources to supplement government funding and traditional student fees. These include:
- Enhanced industry partnerships and knowledge exchange activities that generate commercial income while supporting innovation in the Scottish economy
- Expansion of continuing professional development and executive education offerings that can command market rates
- Development of online and distance learning programs that can reach new student markets globally without requiring physical campus expansion
- Growth of philanthropic giving through more sophisticated advancement operations and alumni engagement
- Commercialization of research through spin-out companies, licensing, and intellectual property development
The University of Edinburgh’s Data-Driven Innovation initiative, part of the City Region Deal, exemplifies this approach by combining academic expertise with industry partnerships and commercial applications. Similar models could be developed across the sector, tailored to each institution’s strengths and regional context.
Outcome-Based Funding Components
Introducing elements of outcome-based funding could help align university activities more closely with national priorities while potentially improving efficiency. This approach would tie a portion of funding to specific outcomes such as graduate employment rates, student satisfaction, research impact, or success in widening participation.
Several international jurisdictions have implemented variations of outcome-based funding, including Norway, Finland, and some U.S. states. While complete reliance on such metrics can create perverse incentives, thoughtfully designed outcome components could complement core funding to drive improvement in priority areas.
The Scottish Government’s emphasis on skills alignment and economic contribution suggests potential receptiveness to such approaches. Any implementation would need
to balance accountability for outcomes with institutional autonomy and recognition of universities’ broader societal contributions beyond immediate economic metrics.
Conclusion
Scotland’s university funding model stands at a critical juncture. The commitment to free tuition for domestic students reflects deeply held values about educational access, but mounting financial pressures raise questions about the sustainability of the current approach. The challenge lies in developing a funding model that preserves the principle of accessible education while ensuring Scottish universities have the resources needed to deliver high-quality teaching and research in an increasingly competitive global environment.
The solutions are unlikely to be found in simple binary choices between free tuition and fees, or between public and private funding. Rather, a nuanced approach that combines elements of different models may offer the most promising path forward. This could include maintaining core public funding while introducing carefully designed graduate contributions, encouraging greater institutional differentiation and collaboration, developing more diverse revenue streams, and incorporating outcome-based funding components.
What is clear is that the status quo faces mounting pressures. As Sir Peter Mathieson warned, avoiding an honest conversation about university funding risks undermining the very institutions that Scotland relies upon for its educational, cultural, and economic development. The path forward requires balancing competing priorities—accessibility, quality, and financial sustainability—in a way that reflects Scotland’s values while acknowledging financial realities.
The ultimate goal must be a funding model that ensures Scottish universities can continue to provide world-class education and research, remain accessible to students from all backgrounds, and contribute to Scotland’s prosperity and wellbeing for generations to come. Achieving this will require difficult but necessary conversations about how higher education is valued and funded in Scottish society.
