The number of university applications received by UCAS is down 7.4 percent on last year as the Higher Education Funding Council for England reveals a cut in teaching funding of £1.1bn.
September marks the first year of increased tuition fees of up to £9,000 - money expected to help plug the gap in funding.
However, if applications remain consistent until the closing date, there will be fewer students vying for university spaces this year which could making university budgets tighter than last year.
The HEFCE will be putting £3.2 billion towards teaching, £1.6 billion into research, £150 million for knowledge exchange, pay £265 million in capital grants and award £125 million in special funding.
Sir Alan Langlands, Chief Executive of HEFCE, said: "As a higher proportion of funding flows from publicly funded tuition fee loans, HEFCE will increasingly invest on behalf of students, supporting excellence and diversity in learning and teaching, and ensuring that people with the potential to benefit from participation in higher education have the opportunity to do so.
"Higher education changes lives. It is vital that all students – those already in higher education, and those embarking on their studies from September 2012 – benefit from high-quality learning and teaching. Our teaching funding is therefore directed towards activities that enrich the student experience and enhance higher education’s contribution to society."