An increasing number of universities in England face “a material risk of closure” unless they dramatically cut costs or merge over the next few years, according to the higher education regulator’s annual health check. The report by the Office for Students (OfS) paints a bleak picture of universities overreliant on international students to plug the gaps left by the declining income from domestic student fees, with the OfS warning that 40% of England’s universities are expected to run budget deficits this year. Susan Lapworth, the OfS chief executive, said: “Financial performance and strength vary significantly for different institutions and our analysis shows that an increasing number will need to make significant changes to their funding model in the near future to avoid facing a material risk of closure. “Many universities have already started this important work to secure their long-term sustainability. They are taking difficult, but necessary, decisions about the shape and size of their institution. They are working with others on mergers or centralised services. And they are doing all of this while protecting the quality of their courses and the interests of their students.” Lapworth said the report was “a signal” for universities to question their assumptions about future student recruitment at home and abroad, saying: “The numbers reported to us for the sector as a whole are just not credible.” While the OfS said it had no concerns about the “short-term viability” of most providers, its modelling for a “reasonable worst-case scenario”, involving significant reductions in international student numbers without cost-cutting, forecast that four out of five institutions would be in the red by 2027. Alex Bols of the GuildHE group, representing 60 universities and colleges, said: “As the financial health of the higher education sector becomes ever more challenging the need for a long-term funding solution becomes ever more urgent. “The increasing costs facing universities, decreasing real-terms tuition fee income and risks to other income streams mean that the likelihood of institutional closure or merger increase.” The government’s recent restrictions to its student visa regime – such as barring many international students from including family members on their visas – have already seen a significant fall in international applications, with one survey reporting a 27% drop in applications for taught postgraduate courses for next year. James Cleverly, the home secretary, is still considering restrictions to the graduate visa route, which allows international students to stay and work in the UK for two to three years after completing their studies, which universities say is vital to compete with rivals such as the US and Australia that have similar offers. The shrinking in applications and the continued freeze on domestic undergraduate tuition fees, which have been set at £9,250 since 2017 and are frozen until 2025-26, has set off a wave of course closures and redundancies. Figures compiled by the University and College Union (UCU) show more than 50 universities and colleges are already making redundancies and other cuts. Jo Grady, the UCU general secretary, said: “The funding model for higher education is broken and needs radical change to put the sector on a firm financial footing. Unfortunately, the Tories seem intent on making the situation worse through constant attacks on migrant students and workers.”