The cash will be ploughed directly into the accounts of individuals or repaid to the colleges if they take recruits applying to cash-in their accounts for their courses.
Talks between the Department for Education and Employment and the Further Education Funding Council were held in advance of the lifelong learning consultation paper launch.
And David Blunkett confirmed that the Government was looking at innovative ways to promote the use of individual learning accounts (ILAs).
Training and enterprise councils have already been told they will lose o150 million out of their o270m reserves to create a million ILAs, but no statement concerning the college's role had been made till now.
Mr Blunkett said: "We will be allowing experiments in which the learner has added resources which would otherwise go to the institution. The money is a kickstart to free individuals to make decisions."
Professor David Melville, FEFC chief executive, confirmed that wide-ranging talks were under way on how colleges could encourage such initiatives. "They need to key in some of our funds, but we should not see this as something negative."
Professor Melville was encouraged by the guarantees and high profile given to further education in the Green Paper, The Learning Age, and the Government's responses to the Kennedy and Dearing reports, published alongside it.
Subsequent comments from Mr Blunkett, who admitted that "there is a dire need for increased funding in FE" confirmed Professor Melville's expectations that there would be considerable new cash for colleges - after the Government's Comprehensive Spending Review in July.
He told The TES: "All references to the extra 500,000 students for further and higher education have been left in. What comes through is the importance of FE in this agenda."
Professor Melville shared concerns, widespread throughout the sector, over the uncertainties about whether it was a White or Green Paper and the delays in publication. "The fact is that we could have had this paper six months ago."
But he is encouraged by what finally emerged.
"The question now is what more money can we lever in. The existing funding is not up to this new agenda. "
However, he reckoned that targeting college cash to learning accounts would end up attracting more money.
Mr Blunkett sees it as a device to make colleges more responsive. The Green Paper describes it as "sensible" to channel cash from colleges and training and enterprise councils through learning accounts.
"This might increase both choice for individuals and total funding by providing a greater incentive to individuals and businesses to match the Government's investment."
The three DFEE papers together offer scope for considerable expansion. The cap has been lifted on higher education expansion in colleges, employers will have to pay at least 50 per cent of work-related college courses and the Government has pledged a raft of measures to increase college involvement in courses for industry and the community. Reforms to student financial support are promised which should help to cut drop-out rates.
Kennedy and Dearing, page 33