> I am not sure how we silently got ourselves into this position

Two things:

1. converting all the old Polytechnics to Universities, in 1992, https://en.wikipedia.org/wiki/Universities_in_the_United_Kin...

followed by

2. trying to get '50%' of kids into further education https://www.theguardian.com/uk/1999/mar/08/johncarvel

The state already paid for education to the age of 18. Another 3 years of specialized education costs (the state) more. Getting more kids into HE, costs more even when they fees that are still state subsidized. Hence the increase in unsubsidised foreign students.

It's debatable whether the desired outcome of better educated and 'more employable' 21 year olds was actually achieved, or whether it simply removed a large cohort from the unemployment figures.