Urgent action is being sought by principals to resolve the mess well before the introduction of the 16-hour rule, which limits cash support for unemployed students, and the Jobseekers' Agreement, which replaces unemployment benefit.
Gillian Shephard, as Secretary of State for Education and Employment, is now better placed to tackle the issues than previously. She is known to be keen on reforms for the unemployed and has fought social security ministers in Cabinet on the question. The struggle for control of education and training for the unemployed has also been one of the "turf wars" she highlighted.
The Association for Colleges has pledged to test Mrs Shephard's resolve and press for reform. Ruth Gee, chief executive, said: "We need to look at the whole question of the 16-hour rule, benefits, discretionary awards and tuition fees. Ad hoc policies have never been the best way forward."
Evidence of the continuing crisis in FE student funding comes from the Unemployment Unit, an independent research group. It shows that some local employment and benefits offices have already put a 16-hour ceiling on study-time before penalising the unemployed. Others have interpreted existing rules more tightly.
One benefits office has put a 12-hour weekly limit on the time an unemployed person could go to college, insisting that the rest would be needed for private study. In another, the Unemployment Unit was given three conflicting interpretations of the rules.
Colleges report a "steady stream" of students dropping out. One principal reckoned she had lost 400 students because of a local interpretation of the rules.
David Eade, principal of Barnsley College and newly-appointed member of the Further Education Funding Council, said: "We have lost 1,300 students since last September. Locally, we have very good relations with the DSS and employment services, but they have their own performance targets and national restrictions."
Ms Gee said the AFC would be pressing for the regulations underpinning the legislation to be clarified. In its recent survey, the association found that while the official Government figure of students on benefits was 80,000, the real figure was in excess of 100,000.
A call for radical reform has also come from Sir Geoffrey Holland, former Permanent Secretary for both Education and Employment. Writing in The TES today, he urges Mrs Shephard to transform the country's 1,000 JobCentres into a careers network for all ages. "The overall aim should be to make lifelong learning a reality; to remove barriers to opportunity and to progression, wherever they may be."
He suggested, before the departmental merger was announced, that the new legislation should be scrapped in favour of an Education Allowance, similar to Margaret Thatcher's Enterprise Allowance. A cash sum and weekly allowance would be paid to an unemployed adult who signed up to full-time study and came off the unemployment register for a year.
Dan Finn, director of research for the Unemployment Unit said: "The 16-hour rule is not the only barrier. There are so many other problems with the employment legislation."