OECD Warns Higher Education Must Redesign Funding Models to Stay Financially Viable

Higher education systems across OECD countries are facing mounting financial strain as declining public funding, demographic pressures and volatile international student markets collide with rising expectations for skills, research and innovation. The OECD report warns that without rethinking funding models, costs and institutional structures, universities risk being unable to deliver on their core missions in a rapidly changing world.

Drawing on analyses from the OECD Directorate for Education and Skills, the European Commission, PwC, UK Research and Innovation (UKRI), the European Tertiary Education Register (ETER), and national higher-education authorities, the OECD report captures the financial tensions now gripping universities and colleges across advanced economies. It reveals a sector that has expanded dramatically over the past two decades but is now confronting fiscal pressures intense enough to challenge its long-assumed stability. Even as participation climbs and research output grows, institutions face shrinking public budgets, demographic decline and increasingly volatile global student markets.

Rising Expectations Meet Shrinking Revenues

The report reminds readers that today’s challenges emerge after 25 years of extraordinary growth in both enrolment and institutional mission. Nearly half of young adults in OECD countries now hold tertiary qualifications, a rate that has doubled since 1999, and systems have diversified far beyond the traditional academic model. Short-cycle and professional programmes, micro-credentials, and adult upskilling pathways have become integral parts of the post-secondary landscape. Universities, meanwhile, have become central research hubs, hosting much of the non-commercial R&D that fuels national innovation.

But these advances collide with structural financial headwinds. Public subsidies have failed to keep pace with inflation; governments face competing demands from aging populations, health systems, and defense budgets. Domestic student numbers are falling in many countries due to demographic decline. International student fees, once a dependable source of growth, have become unpredictable as visa rules tighten in countries like Canada, Australia and the UK. For many institutions, particularly research-intensive ones, external research funding fails to meet full economic costs, forcing substantial cross-subsidies from teaching revenue.

The Value of the Degree Under Scrutiny

Compounding these pressures is a growing debate about the relevance of traditional higher-education pathways. Employers and policymakers increasingly question whether universities are equipping graduates with skills suited to labour markets being reshaped by artificial intelligence. Research cited in the report, including O*NET-based projections from leading analysts, suggests that up to two-thirds of current jobs may experience some degree of automation exposure, with white-collar professions, including architecture, engineering, finance and law, particularly vulnerable. In the US, Ireland and elsewhere, evidence of weakening demand for recent graduates has raised fears that generative AI may be displacing entry-level graduate roles sooner than anticipated.

This questioning of value has intensified pressure on institutions to deliver clearer learning outcomes, strengthen ties to employers and rethink curriculum design. Governments are pushing for greater clarity on what students gain from degrees and how learning programmes align with future labour-market needs.

Cost Pressures and Uneven Revenue Models

The report underscores that financial sustainability ultimately hinges on aligning mission, resources and organisational capacity. Institutions must be able to recover the full economic cost of operations while investing in infrastructure, staff and long-term capabilities. Yet understanding of costs remains uneven. Staff compensation continues to consume the largest share of expenditure, and costs vary significantly across fields, with laboratory-heavy science and engineering programmes far more expensive than classroom-based disciplines.

Higher education remains predominantly funded by public sources, but tuition policies and cost-sharing arrangements differ sharply across countries. In roughly two-thirds of OECD systems, households’ share of funding has declined. Yet in Australia, Canada, Ireland, Mexico and the United Kingdom, it has risen by 10 percentage points or more. Non-household private income, such as philanthropy or industry partnerships, remains limited and volatile, signalling that diversification alone cannot solve structural problems.

Rethinking Funding Models for a New Era

Government funding systems are central to stabilising institutions. While direct grants remain a cornerstone, their structure varies widely: some systems rely heavily on historical allocations, while others incorporate formula-based components tied to enrolment or performance indicators. Denmark and Finland allocate the greatest share of institutional funding based on outputs and outcomes, but evidence shows that performance-based funding yields only modest improvements and risks incentivising quantity over quality if indicators are poorly chosen.

A growing number of countries now use institutional performance agreements, tailored compacts between governments and individual institutions designed to sharpen strategic focus, enhance accountability and align objectives. These tools have proven particularly valuable in small and medium-sized systems.

The report concludes that many OECD countries will need to rethink the size and shape of their institutional networks, redesign research-funding models, and recalibrate tuition and subsidy systems to reflect demographic realities and future skills needs. In doing so, governments must strike a delicate balance: protecting quality, relevance and accessibility while ensuring institutions remain financially resilient and capable of adapting to a rapidly changing world.