A college is now "technically insolvent" after capital funding ran out and faces closing down an entire sixth-form centre with 3,000 students within two years.
Brooklands College in Surrey has been crippled by more than pound;11 million of sunk costs for its merger plans - while a new campus for another merged college, Skelmersdale and Ormskirk, was approved for funding as a "separate case" outside of the public process.
While Brooklands is in talks with the Learning and Skills Council (LSC) for enough financial support to prevent outright bankruptcy at the end of the year, principal Colin Staff said that being encouraged to merge and then denied funds had thrown his college into crisis.
He said: "It beggars belief that ministers are walking away from such levels of gross incompetence, with LSC staff taking up jobs in new quangos, while some colleges are having to consider redundancies to help meet a financial disaster which is not of their making."
The pound;80 million construction plans came out of a decision to merge with struggling Spelthorne Sixth Form College, with Mr Staff saying he had been "repeatedly encouraged, even cajoled" by the LSC.
It was felt that a more vocational curriculum suited the local student intake in Ashford, requiring that the old classrooms be replaced with new workshops and equipment.
Preparation to bring the bid to the brink of approval in detail cost pound;11.5 million for a college with a turnover of just pound;23 million. Mr Staff estimates it will take 15 to 20 years to pay off the debt, before they can begin to think about reinvesting in facilities. "It's a big, big sum of money for us."
Students at the former Spelthorne site, which even now is oversubscribed, were moved into temporary classrooms while the buildings were prepared for demolition. Now they cannot move them back, while permission for the temporary buildings will expire within two years, threatening the complete closure of the site.
Without the encouragement to take on a rebuild, the college believes it could have carried out a modest refurbishment out of reserves and limited borrowing.
The LSC and Government have said no college will be allowed to go bankrupt, but the funding body declined to explain why Skelmersdale and Ormskirk College was given commitments which no other college received.
Despite having been already promised funding, Skelmersdale was put through the evaluation process in the summer - which suggested that eight other colleges should have been ahead of it in the queue for funds, although Brooklands was not one of these.
A spokeswoman said: "This is a separate case as the LSC last year committed to Newcastle College to fund the development of the Skelmersdale and Ormskirk campus once they were in a position to finalise and submit their application.
"We encouraged some colleges to apply for a capital project. In the case of Skelmersdale and Ormskirk, we felt it necessary to make a commitment. Such commitments were not made to Brooklands or any other college."