Scotland’s colleges and universities are facing a financial crisis that has left many institutions teetering on the edge of insolvency, according to two new reports released by the Scottish Funding Council (SFC) on September 26, 2025. With the vast majority of further education colleges and a significant portion of universities forecast to spend more than they earn this year, alarm bells are ringing across the nation’s education sector.
The SFC, which is responsible for monitoring the financial health of Scotland’s colleges and universities and distributing government funds, paints a stark picture: 22 out of 24 further education colleges are expected to post deficits in the current financial year. The outlook remains grim for the years ahead, with 20 colleges still forecast to be in deficit by 2027-28. The cash reserves that once offered a buffer—£130 million in 2023-24—are predicted to dwindle rapidly, falling to £35 million by the end of this financial year and plunging to a negative £46 million by 2028.
“These deficits show that most colleges are not sustainable,” the SFC bluntly stated in its report, as cited by BBC News. The warning is not abstract—four colleges expect to have negative cash balances by April 2026, and that number could rise to 12 by April 2027. Several colleges, especially those forming part of the University of the Highlands and Islands (UHI), are already reporting substantial operating deficits. Perth College’s deficit stands at £1.8 million, Shetland College at £1.5 million, Moray College above £1 million, with Orkney not far behind.
The underlying causes of this crisis are multifaceted. Scottish colleges are heavily dependent on public funding, with SFC grants making up 77% of their income. However, these grants have remained relatively flat, while costs have soared. Staff costs alone represent just under 70% of total college expenses, and have risen steadily due to annual pay awards, employer National Insurance contributions, and pension obligations. Colleges have responded by cutting teaching time, increasing class sizes, and slashing courses with low demand. Yet, according to the SFC, “continued savings of that scale will not be achievable.”
Gavin Donoghue, chief executive of Colleges Scotland, didn’t mince words when reacting to the report. “Colleges have already had investment in them reduced by 17% in real terms since 21/22,” he said, as reported by BBC News. “They’ve taken difficult and often unpalatable decisions to reduce their staff headcount and reduce the amount of students that they teach and are now looking at decisions like closure of campuses and courses. There is no single silver bullet that an individual college can take, it’s clearly a systemic problem that requires sustainable Scottish government funding.”
The numbers back up his assessment. Since 2021, colleges have reduced student numbers by 12.4% and staff numbers by 8.7%—a loss of 667 full-time equivalent jobs, or about one in 15 college staff. Despite these efforts, the sector’s financial position continues to deteriorate. The SFC’s projections show that, unless there is a significant increase in core funding, “a number of colleges may be insolvent by the end of this academic year.”
Scotland’s universities, while less dependent on SFC grants (which account for just 24% of their income), face their own set of daunting challenges. The SFC’s separate report on higher education reveals that 11 of 18 universities are expected to spend more than they earn this year, resulting in a combined deficit of £12.9 million. This is a dramatic turnaround from the £210.8 million surplus reported in 2023, a change the SFC describes as a “significant deterioration.” The situation is even more precarious when the surpluses of Edinburgh and Glasgow universities are excluded; the rest of the sector is left facing a £36.2 million deficit.
Much of the sector’s financial health is now propped up by international student fees, especially from China, India, the United States, Nigeria, and Pakistan. The SFC warns that this is a risky strategy, as global competition, UK immigration policy, and geopolitical changes could swiftly reduce the inflow of foreign students. The University of Dundee is a cautionary tale: after a sharp drop in overseas fee income, it required a £40 million government bailout earlier this year to avoid collapse. The SFC’s report excluded Dundee’s finances because its accounts had not been finalized, but the crisis there looms large over the sector.
Claire McPherson, director of Universities Scotland, called the SFC’s findings “the starkest set of financial figures we have ever seen for Scotland’s universities.” She added, “The Funding Council’s report sounds loud and clear, the financial warnings about a sector at risk, and there are some important things that it does not say. It doesn’t mention job losses, which is the painful reality in many institutions. It also doesn’t reference a decade-long decline in public funding as the major contributing factor to the level of financial exposure institutions face and the hard choices they are forced to take.”
Indeed, public funding for universities and colleges has been squeezed by about 20% in real terms over the past six years, largely due to inflation. According to research by Professor David Bell of Stirling University, per-student funding in some subjects falls far short of the actual costs. For example, in modern languages, universities receive just £7,421 per student—half of what they estimate is required. In dentistry, the shortfall is at least £9,000 per student.
With these pressures mounting, universities and colleges have turned to a variety of cost-saving measures. Several institutions are undergoing staff restructuring, with job cuts, hiring freezes, and the removal of posts. Course portfolios are being reviewed and, in some cases, pared back. The SFC recommends that universities explore the expansion of digital course delivery and overseas partnerships to generate new income streams, but acknowledges that these are not quick fixes.
The SFC’s chair, Professor Cara Aitchison, emphasized the gravity of the situation while also highlighting the sector’s resilience. “We are encouraged by the proactive steps being taken by institutions as they adapt and build in resilience for this changing environment, recognising that this may include difficult decisions to secure long-term financial sustainability, which is a requirement of our Financial Memorandum,” she said. “We continue to engage closely with Scottish Ministers on the case for investment in colleges and universities, which are the drivers for economic growth, addressing child poverty, supporting the transition to net zero and delivering excellent public services.”
As the crisis deepens, stakeholders from across the spectrum are calling for urgent action. College leaders, university principals, and sector representatives agree that the current funding model is unsustainable and that only a significant increase in government investment can ensure the long-term viability of Scotland’s world-class education system. Without swift intervention, the consequences could be profound—not just for students and staff, but for the wider Scottish economy and society.
Scotland’s education sector stands at a crossroads, facing tough decisions and an uncertain future. The coming months will reveal whether policymakers choose to step up with the necessary support or allow the nation’s colleges and universities to continue their precarious balancing act.
