The Welsh Assembly's provisional spending plan - to give colleges no extra cash in 2006-7 - will hit the sector hard, according to fforwm, the Welsh association of colleges.
It says the failure to invest in post-16 education and training will unfairly tip the system in favour of universities.
Colleges will also be forced into greater competition with schools because the new funding system appears to prioritise funding for 16 to 18-year-olds on academic courses, said the group.
John Graystone, chief executive of fforwm, said: "The budget freeze came out of the blue. Colleges had no idea that they were going to be facing long-term cuts in funding.
"However, we have been told that the funding allocations have not been finalised yet. We have met with the Welsh Assembly Government to explain that a budget freeze will mean cuts in vocational learning, cuts in adult and community learning, cuts in courses, and cuts in the number of part-time learners.
"We very much hope that the Welsh Assembly Government will revise the funding allocations to make sure that we can deliver what learners need."
The organisation claims that the proposed budget fails to meet the assembly's policy of reducing competition and increasing the number of teenagers staying in education.
An assembly spokesman said: "Colleges have already been informed that the figures are provisional and subject to refinement in light of the Assembly Government's commitment to work closely with fforwm to ensure the new system best meets the needs of learners in Wales.
"The FE sector has seen a significant increase in funding over recent years, including an additional pound;34 million to ensure parity of pay between FE lecturers and school teachers."