The AoC said direct funding would enable colleges to relieve the critical shortage of HE places.
Less than half of the 260 colleges which provide HE are funded directly. The remainder use franchising agreements with universities, which top- slice an average of 25 to 30 per cent of the funding.
"As record numbers of students are being turned away from university, demand is outstripping supply," said Lesley Davies, AoC director of policy.
"There are some very strong and successful partnerships with universities, but there are also colleges who would like funding without franchise. More direct funding equals a saving on costs and overheads, allowing an expansion of HE places without a growth in higher education funding."
Directly funded colleges are restricted to teaching whole courses, rather than modules. But part-time students, often in employment and seeking vocational or work-related qualifications, make up most of the 160,000 HE students in colleges.
Colleges also fear universities will scrap franchising arrangements rather than compete for limited HE funding with their FE counterparts.
David Willetts, the higher education minister, signalled the Government's aim to expand FE provision of degrees in a speech at Oxford Brookes University earlier this summer.
"I do think it's possible to provide good-quality HE in an institution that doesn't award its own degrees, and institutions may find it is cheaper and more efficient as well," he said.