Brooklands College in Surrey has decided to keep its campus in Ashford open despite announcing last year that it was forced to close because finances had been so badly affected by the funding shortage.
A bill of more than pound;11 million for preparatory rebuild work left the college struggling when the Learning and Skills Council (LSC) was unable to reimburse its costs.
The decision to close it cast doubt over the Government's promise that no college would go under as a result of the mismanagement. Until two years ago, the Ashford campus had been a sixth form in its own right.
But then principal Colin Staff stepped down and an interim management team from FE Associates was put in place. It revealed that the college's debts were only pound;3 million, with reserves having covered the remainder, and reviewed the decision.
Now a new interim principal, Bill Grady, who has worked in troubleshooting roles at eight colleges in recent years, has decided that the college can manage its level of debt.
Mr Grady said that redundancies are likely, however, and he estimates that the college has between 5 and 7 per cent more staff than similar institutions. Reducing the staffing levels by this amount would save up to pound;1.3 million, he said.
"We still have to deal with an overdraft situation," he added. "If we don't get help from the LSC, it could take between three and five years."
Members of the National Union of Students (NUS) claimed the U-turn as a victory for their campaign.
Shane Chowen, NUS vice-president for FE, said: "We are delighted. This is a campaign that came directly from the students and to have this decision reversed is a massive win."