Colleges could be run for profit by private companies or under John Lewis-style co-operatives, according to radical proposals put forward by the Skills Funding Agency (SFA).
Geoff Russell, the agency's chief executive, said that businesses could take over the running of colleges that were struggling financially or in the quality of provision. He said the private sector would "bite my arm off" for the chance to take over a failing college.
He also said that under-performing colleges could become mutual co-ops so that staff would benefit financially from working more efficiently, just as John Lewis offers its employees a share of proceeds.
"We are almost replicating the drive for improvement from the profit motive in the private sector," Mr Russell said.
He acknowledged that staff in the public sector were not driven by profit: "It's different in colleges because people are motivated by the educational benefit."
Mr Russell said that he had not so far had any approaches from college teams who wanted to take over their operations.
Peter Pendle, general secretary of the Association of Managers in Education, said the proposal was a distraction from the real work of running colleges. He said: "I think this is another of Geoff Russell's ideas which is doomed to abject failure."
Mr Pendle said the SFA had pushed colleges into a series of responses to the reduced funding, from mergers to shared services, which it had either retreated from or which proved impossible to follow because of rules on VAT that wiped out the savings in the case of shared services.
He said: "What college leaders and managers want to do is focus on running colleges, delivering top-quality services and results for students and employers. The last thing they need is another diversion from that."
FE Focus reported earlier this year that leisure and hospitality provider HIT Training had discussed taking over a college, but that it was likely to want legislative changes allowing it to take over the assets in order to make a deal viable.
Mr Russell said that under either a co-operative or a private company, the SFA would continue to determine whether assets could be sold to ensure that the proceeds were put back into education.
But Paul Warner, director of delivery at the Association of Learning Providers, said that private providers faced some obstacles in taking over the work of an entire college.
He said it would only be possible for a handful of large providers whose work spanned the whole curriculum, but that there might be more interest in franchising particular areas of provision.
Many of the larger providers were involved in new contracts with the Department for Work and Pensions, which involved huge up-front capital costs with the payments only coming "much later", Mr Warner said, so they were less likely to want to add the risk of a failing college.