Scotland’s Colleges Face a Financial Crunch as Student Numbers Fall and Reform Stalls

10th September 2026

Scotland’s college sector is facing a financial problem that cannot be solved simply by asking colleges to cut their cloth a little tighter.

That is the uncomfortable message from a new Audit Scotland report which shows colleges cutting staff, reducing courses and relying increasingly on short-term financial support while the number of students being taught continues to fall.

The figures make uncomfortable reading.

Scotland’s 19 incorporated colleges recorded a combined £5.6 million deficit in 2024/25, up from £1.9 million the previous year. At the same time, five colleges needed a total of £13.9 million in additional financial support from the Scottish Funding Council, compared with £5.4 million in 2023/24.

Audit Scotland says the arrangements for repaying some of this support are not always clear. In some cases advances have effectively been rolled forward, raising the question of whether what is being described as short-term cash-flow assistance is actually masking longer-term financial problems.

And the warning goes further.

In April 2026, the Scottish Funding Council assessed eight of Scotland's 25 colleges as being at very high financial risk, including seven incorporated colleges. A further six were judged to be at high risk.

That means more than half of Scotland's colleges were considered to be at high or very high financial risk.

The workforce has already been cut

Colleges have not simply sat back and waited for more money.

They have been cutting their workforces.

The college workforce has fallen by 13 per cent in full-time equivalent terms since 2019, while the wider devolved Scottish public-sector workforce increased by 12 per cent over the same period.

In 2024/25 alone, 282 staff left colleges through voluntary severance schemes, costing £7.2 million. No colleges made compulsory redundancies.

Yet despite these reductions, staff costs actually increased to £553.7 million and account for about two-thirds of college expenditure.

National pay settlements mean that pressure is unlikely to disappear.

This is an important part of the story because it shows that the problem cannot simply be described as colleges employing too many people.

There are fewer staff, but the cost of employing them is still rising.

Fewer students, fewer courses

Perhaps the most important warning for the future is happening in the classroom.

The number of students attending Scottish colleges fell by almost 40,000, or 15.9 per cent, between 2022/23 and 2024/25.

Course enrolments fell by more than 70,000, or 21.4 per cent.

Both student numbers and enrolments are now at their lowest level in a decade.

The colleges have also reduced the amount of teaching they deliver. Teaching credits were down eight per cent over the two years to 2024/25.

That might sound like a straightforward response to falling demand. But it is not that simple.

Audit Scotland reports that colleges are still reducing the courses they offer and that Colleges Scotland believes they are increasingly unable to meet student demand.

A student who cannot get onto a particular course may move to another course, another college or straight into employment. That makes it surprisingly difficult to measure how much demand is actually going unmet.

For employers, however, the question is potentially much simpler: are colleges producing the skills that Scotland's economy will need?

There is some genuinely good news

It would be wrong to portray the report as saying that Scotland's colleges are failing.

In several important respects they are doing remarkably well despite the financial pressure.

Student success rates improved. For students on courses lasting 160 hours or more, the complete success rate rose from 71.7 per cent to 75.1 per cent in 2024/25.

Some of the most disadvantaged groups also saw improved outcomes.

And 85.4 per cent of college leavers went on to employment, training or further study within six months.

Colleges also remain an important route into university for people from Scotland's most deprived communities. In 2024/25, 2,420 university entrants from the most deprived 20 per cent of areas had progressed from college, the highest number in a decade.

Student satisfaction was also high, with 94.9 per cent of respondents saying they were satisfied with their college experience.

So this is not a story about poor teaching or colleges failing their students.

It is a story about a system that is becoming harder to finance.

The funding problem

The Scottish Government has increased college funding for 2026/27 by more than nine per cent in cash terms.

That sounds impressive until inflation is taken into account.

Audit Scotland calculates that college funding has fallen by 7.5 per cent in real terms over the five years to 2026/27.

The Government has also announced an additional £146 million for colleges over three years to 2028/29.

But there is a catch.

Colleges do not yet know how £84.6 million of that money will be distributed over the final two years of the spending review period.

That makes long-term financial planning extremely difficult.

And the forecasts prepared by colleges before the latest funding uplift were already predicting combined deficits of £19 million in 2025/26, £27 million in 2026/27 and £32 million in 2027/28.

Audit Scotland says the latest funding increase may provide some short-term relief but does not remove the underlying sustainability problem.

The billion-pound elephant in the room

There is another problem which will be familiar to anyone who has followed the condition of Scotland's public buildings.

Colleges have a huge maintenance and investment requirement.

The estimated cost of dealing with maintenance backlogs and transforming campuses to meet net-zero ambitions was put at close to £1 billion.

Capital maintenance funding has increased to £42.7 million for 2026/27, but Audit Scotland says there remains a significant gap between what is available and what is needed.

Overall capital investment in the sector has actually fallen by about a third in cash terms this year.

The Scottish Funding Council is expected to publish an Infrastructure Investment Plan this autumn. That should give a clearer picture of the scale of the problem.

Can colleges become more commercial?

One answer being encouraged by the Scottish Government is for colleges to generate more of their own income.

There is a problem with that idea.

In 2024/25, 77 per cent of college income came from Scottish Funding Council grants. Only 14 per cent came from tuition fees and contracts, with commercial activities forming only a small part of the remainder.

Audit Scotland found that colleges have limited opportunities to expand commercial income and that those opportunities vary considerably between institutions.

There is also a danger that colleges could end up spending more time chasing commercial contracts and less time concentrating on their core educational role.

The experience of Forth Valley College illustrates the difficulty. It lost a Scottish Prison Service learning and development contract to a private training provider because it could not compete on price, despite the technical and quality aspects of its bid being described as excellent.

That raises an interesting question.

If the Government wants colleges to behave more like businesses, should they also be given the financial freedoms that ordinary businesses have?

Colleges' status as public bodies restricts their ability to carry forward surpluses, borrow to invest in new income-generating activities and operate with some of the flexibility available elsewhere.

Audit Scotland says discussions are continuing about how those restrictions might be changed.

And then there is reform

Perhaps the sharpest criticism in the report concerns the pace of reform.

Audit Scotland made eight recommendations in its 2025 report.

A year later, all eight remain in progress and three are overdue.

Audit Scotland says some of the reforms should have happened sooner, particularly given the reductions in funding.

The Government has now launched its "College Sector of the Future" workstream, with findings and recommendations expected by the end of 2026.

But the concern is obvious.

Scotland has already spent years discussing how its college and wider post-school education system should change. The financial pressures have arrived faster than the reforms.

The review of the college funding model, for example, has been sought for years and implementation is not expected until 2028/29.

Audit Scotland's message is therefore not that nothing is happening.

It is that it is happening too slowly.

What does this mean for places such as Caithness?

This matters well beyond the college sector itself.

In rural and remote areas, a college can be much more than a place where young people obtain qualifications. It can be one of the few institutions directly connecting education, employers and the local economy.

That makes decisions about courses, campuses and staffing particularly important in places such as Caithness and the wider Highlands.

The Audit Scotland report includes UHI North, West and Hebrides as a particularly striking example. The college, created by the merger of UHI North Highland, UHI Outer Hebrides and UHI West Highland, recorded a £2.2 million deficit in 2024/25 and £4.7 million over its first two years.

It also had net liabilities of £8.7 million.

The college says it is implementing a financial recovery plan and forecasts a return to financial balance by 2027/28. Audit Scotland also notes that its cost base is now lower than the combined cost of the three colleges before the merger.

That is important because it shows both sides of the argument about restructuring.

Merging organisations can reduce costs, but it does not automatically make the underlying financial problem disappear.

Scotland cannot afford to get this wrong

The danger is that the debate becomes reduced to another argument about whether the Scottish Government should put more money into colleges.

More money would certainly help, particularly where buildings need major investment and colleges are struggling with rising employment costs.

But Audit Scotland is pointing to something bigger.

Scotland needs to decide what it actually wants its college system to achieve, where courses should be provided, how many students it needs to serve, what skills employers will require and how much of the cost should be met by government.

It then needs a funding system capable of supporting that ambition.

At present, the Government is asking colleges to reform, reduce costs, generate more income and respond to the changing economy while giving them limited certainty about their future funding.

That is a difficult combination.

The remarkable thing is that colleges are still producing good outcomes for many students.

The worrying question is how long they can continue doing so if the financial foundations beneath them remain under pressure.

Audit Scotland has effectively given ministers until the end of 2026 to come up with a convincing answer.

For Scotland's students, employers and taxpayers, it is an answer worth watching very closely.

Read he full Audit Scotland report HERE
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