Ministers have agreed to extend application deadlines for funding to cover the cost of enrolling students who receive an education maintenance allowance (EMA).
Colleges were paid pound;70 per student to cover the administration costs of helping with EMA applications - which require students to set up bank accounts as well as provide proof of parental income.
EMA applications had to be completed by the end of October for colleges to qualify for the money, but many students are taking much longer to enrol on a course.
Now, the Department for Education and Skills has agreed to extend the October deadline until the end of January.
Julian Gravatt, director of funding and development at the Association of Colleges, asked the DfES for an extension. He argued that the kind of students who are slow to sign up for courses are precisely those that the EMA scheme is designed to encourage.
Principals say the pound;70 payment is not enough to cover the entire administrative cost of recruiting EMA-funded students, but withdrawing this amount would cause financial hardship.
In a letter to the DfES, Mr Gravatt said: "There are concerns that the slow progress of some 16-year-olds going through the application process means that colleges will miss out on the pound;70 because of the October 31 2004 deadline."
The DfES has now notified all colleges of the deadline extension. In its letter, the DfES said the decision had been made because of "representations from colleges that a significant number of EMA recipients will not return to learning until January".
It continued: "Learners in this category are likely to be drawn from the hardest-to-engage group of young people, and it is important we encourage colleges and schools to reach out to the most vulnerable."
EMAs are means-tested grants of up to pound;30 a week aimed at encouraging 16 and 17-year-olds to stay in full-time education after school. The scheme went national in September after nationwide pilot schemes last year.
The pilots and the experience of the national scheme show that the application process, overseen by Capita, has not always gone smoothly, and that many students need help to prepare their applications. Many were still waiting for their cash at the start of term.
The AoC's research says management of the EMA scheme is, in effect, being subsidised by colleges, which must pay staff to help students through the process.
It says a typical college with 200 EMA students would get pound;14,000 from the DfES to compensate for administrative costs but spends some pound;20,000 on doing the work. This includes employing an extra member of staff.