Funding and finance
Understanding college finances
There is little public commentary and data on English colleges. DfE collects a large volume of finance, student and staff data from colleges but lacks the analytical capacity or the leadership interest to process or publish this in a way that would help colleges with budgets or pay decisions. There are no comparable reports to the twice-a-year Office for Students assessment of university finances or the once-a-year report on Scottish colleges by Audit Scotland
Recent improvements in financial health
Many colleges started the 2025/26 academic year in a stronger financial position than previous years. DfE’s assessments for the 2024/25 academic year showed 84% of colleges with good or outstanding financial health which is the highest percentage for four years. In 2020, the National Audit Office reported college progress in improving their finances between 2014 and 2019. Financial support and cost savings provided a temporary boost to college finances in the 2020-1 financial year.
Colleges in financial intervention
This time a year ago, just 9 (4%) FE colleges and designated institutions had financial health notices to improve. 2 of those colleges have left intervention and are in post-intervention monitoring while 3 more merged in the subsequent six months. Meanwhile DfE issued financial notices to 3 colleges in spring 2026, following a review of their 2024-5 financial accounts. There are now 7 (3%) FE colleges and designated institutions with financial notices. DfE’s oversight policy, the official advice available for colleges in financial difficulty and the college-to-college merger process (where this is an appropriate option) have become a relatively effective way to tackle institutional financial difficulty.
Recent decisions on 16-18 funding
For seven years between 2013-4 and 2019-20, funding rates for 16-to-19 education were fixed in cash terms despite inflation. For most of the last seven years there have been increases but unpredictable amounts. Funding rates were increased by just 1.9% for the 2024-5 financial year. For 2025-6, there was a 5.4% increase in rates, along with increases in programme cost weights and disadvantage factors. DfE recently reported that these resulted in an average 8% rise in funding per 16-18 student which, in 2025-6 many colleges, offset decisions to cut the adult skills budget by 3% and freeze apprenticeship rates for another year. However, for 2026-7, the decision announced in March 2026, was a 0.55% increase in funding rates resulting in an estimated 1.6% rise in funding per student.
The 0.55% increase in 16-to-18 rates contrasts with DfE decisions to increase early years funding rates by 4% to 5%, an estimated 2.5% increase in pre-16 funding per school pupil and the 2.7% increase in the higher education fee cap.
The 2025 spending review promise
The promise in the spending review published in June 2025 that the 16-18 budget would increase by £1.2 billion (15%) over a three-year period and that there would be a £2.3 billion skills capital budget over four-years provided a certain level of confidence about future funding.
Pay decisions for the 2025-6 academic year
Many (80%) FE colleges were able to match or exceed the AoC 4% pay recommendation but a significant minority (20%) could not.
Financial challenges in summer 2026
Nine months later, the outlook for college finances is more troubling. 5 colleges have had financial notices to improve since the start of 2026, taking the total number to 7. Cashflow continues to be the main prompt for financial intervention and, although this often occurs in colleges with capital projects, the number of colleges missing the FE commissioner solvency benchmark (40 cash days across the year) has doubled from 2022/23 (12%) to 2025/26 (25%). Colleges with limited cash balances have to limit or defer spending, for example pay rises or capital.
Declining operating margins
15 (8%) fewer colleges anticipate a budget with 6% EBITDA in 2025/26 compared to 2024/25 which means the majority (58%) of colleges set revenue budgets considered by DfE to “require improvement”.
Financial health ratings are limited
DfE only uses financial health ratings in FE (not in schools or universities) and the scores are slightly antiquated but they give a slightly misleading picture. College scores are bolstered by falling debt levels (annual repayments combined with no opportunity to borrow) and rising cash balances. In recent years, vacancies have resulted in some colleges reporting a more positive outturn than they would if they had a full staff complement. The number of vacancies is now falling.
Government funding decisions for the 2026-7 academic year
Several of the decisions made in spring 2026 showed the Department for Education unable to match the promises about colleges and skills in its decisions on funding. For the second year in a row, DfE used an affordability factor (75% this year compared to 67% last April) to reduce the amount of in-year growth funding paid to colleges from the amount in the formula published in August 2025. That formula pays around 50% of the full funding amount so the decision means that colleges receive 37.5% in 2025-6. DfE also delayed an announcement until April 2026 to ensure that the spending will be accounted in its 2026-7 financial year, which defers the costs relative to last year when a comparable figure was spread across two years (2024-5 and 2025-6). The pressure of higher numbers contributed to the decision to limit the 16-18 rate increase to 0.55%, with DfE calculating that average funding per student will rise by 1.6%. There has still not been a proper explanation of how the promised £1.2 billion increase in the 16-18 budget will be allocated or the £800 million increase for the 2026/27 academic year.
Likelihood of delays in future DfE decisions on in-year growth
DfE was late in making decisions on in-year growth in April 2026. This is likely to happen again. The Department’s budget is overstretched because of difficulties controlling high needs and childcare funding. DfE will be able to account the £87 million cost of 2025-6 in-year growth funds in its 2026-7 financial year because it made the announcement about allocations in April 2026. It is unlikely there will be room in the 2026-7 financial year budget for further spending on this line so it is highly likely that any announcement will be deferred to April 2027. It should still be possible for DfE to publish indicative rules and a calculator to confirm an intention to take a similar approach for 2026-7 but, without an explicit addition to the budget, there is likely to a similar delay and uncertainty next year as this year. Colleges, like schools, started the 2026-7 admission process in September 2025 and, based on the information they have so far, anticipate 22,000 additional students compared to the amount they are being funded for
Department for Work and Pensions responsibility for skills
The Department for Work and Pensions was given responsibility for adult skills and apprenticeships in the September 2025 ministerial reshuffle and, although this may create longer-term opportunities, the short-term consequence has, to some extent, been a slowdown in decision-making while ministers and senior officials adapt.
Apprenticeship changes
The levy-funded apprenticeship budget rises by 6% in the 2026/27 financial year but information on defunded standards and new unit and foundation apprenticeships came late in spring 2026, creating a risk of reductions in activity and therefore income.
Adult skills budgets devolved but eroded in value
The adult skills budget remained fixed in cash terms which was a better outcome than the previous year’s 3% cut but far short of what is needed if skills are to support the industrial strategy and growth. The pace of devolution is increasing.
10 strategic authorities controlled 51% of the adult skills budget in 2024/25. Within just 24 months (for the 2026/7 academic year), there are 20 strategic authorities, just 14 of which have mayors, controlling 77% of a budget that has continues to be fixed in cash terms. The Devolution Priority Programme will bring 6 new strategic authorities into effect for the 2027-8 academic year. 26 authorities will control almost 90% of adult skills funds.
The carve-up of budgets generally felt like a net positive for colleges in devolved areas in 2019 with local engagement, recycled underspends and redirection of out-of-area funds offsetting extra bureaucracy. In 2026 new authorities are smaller in size and have smaller budgets but the number of boundaries has escalated and over performance on all budgets. Colleges across the country face unexpected reductions in funding available for adult skills in 2026/27. The underlying issue is that the adult budget is worth 30% less in inflation-adjusted terms than it was when the process started.
High needs income more important for colleges
An increasing share of college income relates to students with high needs but funding levels often barely cover direct staffing costs with little or no contribution to necessary overheads. Demand from students for support is rising but the Department for Education plans major changes with effect from 2029 to control costs. In preparation for these changes, DfE is distributing a new grant worth £83 million to 16-19 providers. The Inclusive Mainstream Fund will provide £69 million to FE colleges in 2026-7.
Limited diversification of income away from DfE or DfE
Although two colleges secured major prison education contracts and a few colleges have been able to expand higher education or other enrolments, there has been little income diversification compared to past decades. This, combined with success in attracting 16-18 students, means that FE colleges, on average anticipated securing 62% of their income from 16-18 education in 2025/26. With DfE forecasting a peak in the number of 15-year-olds in 2027, there are long-term risks for colleges in relying on one big source of funding. There are more immediate risks in the fiscal pressure on the UK government as a result of sluggish economic growth, high debt interest costs and pressures to spend money elsewhere.
Risks of higher inflation in 2026
Hopes in the government’s autumn 2025 budget that inflation would revert to the 2% target have been dashed by the Middle East war with the UK vulnerable to inflation. There have not yet been supply shocks of the sort visible in some Asian countries but there is a risk that energy prices could increase in the second half of 2026 in the way they did at the same time of the year in 2022. Colleges typically spend 2-3% of their income on energy but knock-on effects to other suppliers are difficult to manage. Colleges cannot just cancel student transport, cleaning, exam administration or other services provided on contracts which may allow price rises. The costs of some services such as cybersecurity, are escalating at a faster rate.
Impact of minimum wage increases in 2026 and 2026
There was a 4.1% increase in the national minimum wage in April 2026 and the Low Pay Commission forecasts an April 2027 increase of between 2.5% and 5.0% based on its current link to average earnings. The minimum wage covers a growing share of directly employed college staff plus those in people-intensive outsourced services.
Pay expectations in 2026
Staff expectations about the ability of colleges to make pay rises may have been shaped by recent increases in colleges and current settlements in comparable sectors (for example, 3.3% pay increases in local government or the NHS or a recent 2% offer by university employers). AoC is responsible for a National Joint Forum for further education which seeks agreement with five trade unions on pay and related employment issues. SFCA runs different pay arrangements for sixth form colleges. The DfE decisions to increase FE funding rates by less than 1% creates sizeable challenges in meeting staff expectations. Many colleges have no money for a pay award and will only be able to make one at the expense of their financial health. Fewer than 30% colleges met the FE commissioner benchmark that staff costs should be less than 65% of income.
Rising 16-18 student numbers
There are some positive trends offsetting the bad news. Rising 16-18 student numbers in recent years, including autumn 2025, will have helped some colleges increase their average group size, though continuing qualification reforms sometimes make this difficult.
Reductions in pension contributions
Most colleges have benefitted from reductions in the employer contributions to the Local Government Pension Scheme as a result of an increase in funding levels (average funding levels have risen from 107% to 123%). Before the reduction, LGPS contributions costs the typical college 2-3% of income. Some college contributions are falling by one-quarter to one-third. However, the new rates only last for three years and the positive assumptions (lower expectations for inflation reducing the value of liabilities) might be reversed in 2029).
Employer contributions to the Teacher Pension Scheme are also likely to fall from April 2027 but the valuation is not yet finished and HM Treasury will almost certainly reduce the grant budget paid to colleges and other public sector organisations by an equivalent amount. A small change in discount rates (up from CPI+1.7% to CPI+2.0%) is the basis for this prediction.
Interest income and costs
The majority of colleges have short and long-term cash balances which exceed their long-term borrowing which means that the increase in UK interest rates since 2022 has been a positive factor in annual budgets. Total college debt peaked peaked at £1.5 billion in 2015 but has been a downward trajectory for ten years because total repayments have exceeded new borrowing. On the day that the Office for National Statistics (ONS) reclassified colleges to the public sector, the Department for Education (DfE) introduced controls on new college borrowing and, as a result there have been no new bank loans taken out since spring 2023. Colleges used to take out loans running for 4 or 5 years though some have much longer contracts in place dating from the 2010s. When each contract expires, DfE repays the loan and replaces it with a government loan. This process will continue into the 2030s. This ban on new college borrowing has made colleges more reliant on DfE capital grants and has also created an incentive for colleges to set aside cash, including by selling assets, to pre-fund future capital spending. Total college long-term loans now amount to less than £650 million and DfE is now the largest lender.
Budget setting in 2026-7
Most colleges will be able to set 2026-7 budgets that will comply with their existing financial targets and the limits placed by key financial stakeholders such as DfE and banks. Upward pressure on costs combined with inadequate funding will result in more colleges setting budgets that breach FE commissioner benchmarks and result in financial health judged as requires improvement but the starting position outlined above provides some protection.
The economic outlook has worsened in 2026 and it is likely that public spending on education will be held down in future years to meet fiscal targets. Most colleges will be cautious about any decision to bake in costs.
For a small but significant group of colleges, their 2026/27 budgets and future prospects are so tight that cash running short and external DfE intervention is highly likely.
Julian Gravatt
Association of Colleges
Posted on 1 June 2026. Updated on 8 June 2026