Scotland's Colleges on the Brink - How Deep the Financial Crisis Really Runs

28th January 2026

Much of the public debate about the financial crisis in education has focused on universities. Yet quietly, and in some cases more severely, Scotland's colleges and further education colleges across the UK are sliding into a funding crisis that now threatens their basic viability.

The evidence from official audits, funding council forecasts and sector warnings paints a stark picture: widespread deficits, collapsing cash reserves, and a growing risk that multiple colleges could simply run out of money.

A sector moving rapidly into deficit

According to the Scottish Funding Council's (SFC) financial sustainability analysis, the college sector is already operating on a fragile footing. In the 2023-24 financial year, nine Scottish colleges recorded adjusted operating deficits, meaning their day-to-day spending exceeded their income. This was not a temporary blip but the early stage of a worsening trend.

Looking ahead, the projections are far more alarming. For 2024-25, 17 out of Scotland's 24 colleges — around 68 per cent of the sector are forecast to be in deficit. By 2025-26, the SFC forecasts show 22 colleges, or 92 per cent of the sector, operating at a loss. In other words, within two years, almost the entire college system is expected to be spending more than it receives.

This is not a situation in which a few poorly managed institutions are struggling. It is a systemic funding failure, affecting almost every college regardless of size or location.

Cash reserves are collapsing

Deficits alone do not necessarily cause insolvency — but cash flow does. And here, the picture is even more troubling.

SFC forecasts show that sector-wide cash reserves — the money colleges rely on to pay staff, utilities and suppliers — are shrinking rapidly. At the end of 2023–24, Scottish colleges collectively held around £130.5 million in cash. By 2025–26, that figure is expected to fall to just £35.1 million.

Beyond that point, the projections are stark. If current funding trends continue, cash balances could turn negative by 2027–28, meaning the sector as a whole would be unable to meet its obligations without emergency intervention. At the same time, the number of colleges experiencing net cash outflows spending more cash than they bring in — is forecast to rise sharply.

This is why the debate has shifted from "financial pressure" to the real risk of insolvency.

Some colleges are already in acute distress

While summary tables often avoid naming individual institutions, external audits and local reporting confirm that some colleges are already deep in trouble.

One of the clearest examples is UHI Moray, which has been identified as having one of the largest proportional deficits in the sector. In 2023–24, it recorded an operational deficit of around £1.05 million, equivalent to nearly 7 per cent of its income. Despite staff reductions and severe cost-cutting, the college has struggled to stabilise its finances without additional support — a sign of structural, not temporary, weakness.

Other institutions, including West College Scotland, have also reported deficits, and Audit Scotland has confirmed that at least two colleges required emergency funding simply to remain operational. These are not hypothetical risks; they are live interventions to prevent immediate failure.

Warnings of insolvency are no longer theoretical

The sector’s representative body, Colleges Scotland, has issued one of the starkest warnings yet: up to 11 of Scotland’s 24 colleges could run out of money within a year or so if current funding conditions persist. This warning focuses not on accounting deficits, but on liquidity — the risk that colleges will be unable to pay staff or bills as cash dries up.

In public-sector terms, insolvency does not necessarily mean formal bankruptcy proceedings. But it does mean loss of operational independence, emergency bailouts, mergers, closures, or enforced restructuring. In practice, it would represent a fundamental failure of the current funding model.

Why colleges are under such pressure

The causes of this crisis are well documented and widely acknowledged by Audit Scotland and the Scottish Funding Council.

At the core is chronic underfunding. College funding in Scotland has fallen by around 17–20 per cent in real terms since 2021–22, eroded by inflation and flat cash settlements. At the same time, colleges face rising staff costs, higher energy bills, and growing maintenance backlogs across ageing estates.

Unlike universities, colleges have very limited ability to generate alternative income. Around 77 per cent of their funding comes directly from the SFC, leaving them highly exposed to government budget decisions. Student numbers in some regions have stagnated or declined, further constraining income.

These pressures closely mirror the crisis facing universities — which are grappling with falling international student income and rising costs — but colleges are often less resilient, with smaller budgets and fewer reserves.

How this compares with the wider UK

While Scotland has the most detailed and transparent forecasting, further education colleges across the UK face similar long-term pressures. In England and Wales, FE funding per student remains well below 2010 levels in real terms, despite recent increases. Many colleges operate on tight margins after years of cuts, leaving them vulnerable to inflation shocks and rising wage costs.

The difference is that Scotland’s data now shows the problem in aggregate and unavoidable terms: this is not about individual failures, but about a sector that, as currently funded, cannot balance its books.

A crisis with national consequences

Colleges play a central role in skills training, apprenticeships, local employment pipelines and social mobility. Their instability therefore has consequences far beyond education budgets. If colleges are forced into closures or mergers, the impact will be felt most sharply in regional economies and by students who rely on local provision.

What makes the current moment particularly dangerous is the speed at which financial resilience is eroding. Once cash reserves are exhausted, options narrow rapidly.

The evidence is overwhelming. Scottish colleges are facing a financial crisis that is at least as serious as that confronting universities. The majority are already operating or forecasting deficits. Cash reserves are collapsing. Some institutions are already reliant on emergency funding. Sector leaders warn that nearly half of Scotland’s colleges could run out of money in the near term without intervention.

This is no longer a question of efficiency savings or better management. It is a question of whether the current funding model allows the college sector to survive at all. Without a significant reset — either through increased funding, structural reform, or both. Scotland risks presiding over the slow, silent collapse of one of its most vital public education systems.

Scottish Government Response

The Scottish Government has responded to the financial crisis facing colleges, but official action so far has been limited and largely focused on short-term measures, planning processes, and engagement with sector bodies. The overall impression from government statements, sector reactions, and recent reports is that ministers are aware of the problem, have taken some steps, but have not yet delivered a strong or sufficiently large funding package to resolve the crisis.

Here’s the most complete and current picture of what the Scottish Government has offered with respect to college financial pressures:

Funding allocations and budget settlements — limited increases

In recent budgets, the Scottish Government has maintained funding for college teaching at broadly similar cash levels as previous years, aiming to protect investment where possible. There has also been a small increase in the total capital budget for colleges for 2024–25.

However, sector bodies are clear that this is far from enough. Colleges Scotland has pointed out that the draft budget provided well under half the extra funding needed just to keep up with inflationary costs, leaving the sector with a 17 % real-terms cut since 2021–22.

In short, while the government sustained funding rather than cutting it outright, real-terms investment has still fallen, and the increases offered in recent budgets have not kept pace with rising costs or the scale of financial problems.

Collaborative planning and short-term flexibilities

Some structural and planning measures have been advanced in partnership with the Scottish Funding Council (SFC) and colleges:

The Scottish Government participates in the Tripartite Alignment Group alongside Colleges Scotland and the SFC. This group aims to identify workable flexibilities to help ease financial pressures — for example, allowing modifications to the college funding model and support for managing estates.

The SFC itself has introduced temporary flexibilities through changes to credit thresholds and some funding rules, designed to give colleges short-term relief and reduce exposure to penalties for under-delivery.

These efforts demonstrate that ministers are engaged in sector-level strategy discussions, but they are incremental rather than transformative.

Funding settlement criticisms and calls for more

Despite these steps, sector representatives and unions have criticised the government’s response as inadequate:

Colleges Scotland’s comment on the draft Budget explicitly states that the settlement fails to recognise the vital role of colleges and leaves them millions short.

National Union of Students (NUS) Scotland has echoed these calls, urging the Scottish Government to increase education funding in real terms, rule out cuts altogether, and expand maintenance support for students.

Both organisations have framed the budget process as a key opportunity for ministers to reverse decline, with students, staff and communities calling for a step-change in investment.

Longer-term structural considerations

There are indications that the government is thinking about long-term sustainability, not just short-term fixes:

Discussions around the funding model for colleges point to possible model redesigns rather than just keeping the old system going.

Engagement with the SFC’s sustainability forecasts and recommendations suggests ministers understand the scale of the problem, and planning documents like the Medium-Term Financial Strategy frame broader fiscal pressures that education must fit within.

These kinds of planning processes can be important precursors to more decisive policy change, but they do not in themselves deliver extra operating income to institutions facing immediate cash shortfalls.

Sector pressure remains strong

Given ongoing funding constraints, many colleges have been forced to cut costs, reduce staffing, shrink teaching rosters, or prioritise less expensive courses — all of which contribute to declining student numbers and service quality concerns.

Reports have warned that without a significant funding reset, up to 11 colleges could run out of money in 2026–27 under a flat-cash settlement.

Summary: What the Scottish Government has offered — and what remains missing

What has been offered or done:

Funding levels maintained and small capital budget increases.

Collaborative planning with the Scottish Funding Council and Colleges Scotland on flexibilities and funding model reform.

Provision of emergency and short-term adjustments through SFC flexibilities.

What critics say is still missing or inadequate:

Real-terms increases large enough to counter the 17–20 % funding cut since 2021–22.

A sustainable long-term funding settlement that prevents colleges from exhausting cash reserves.

Structural reforms that go beyond temporary adjustments and address the scale of financial challenges.

Faster action to boost student and staff support in line with rising living costs.

The Scottish Government has recognised the financial problems facing colleges and engaged with sector partners on planning and short-term relief measures, but to date its direct solutions have not matched the depth of the crisis. Colleges and student representatives continue to call for significant reinvestment, real-terms funding increases, and structural reform in the next budget cycle to avoid institutional insolvencies and long-term decline.