Shetland College of Further Education, which is still part of its local authority, is about to have its pound;1.2 million deficit written off - even though the authority is struggling to balance its own books.
The college has been running at a loss for the past four years after the FE funding council decided to reduce its level of support by pound;2 million between 2001 and 2006.
To cut costs, Shetland dropped six staff and more than doubled the number of students it enrolled, from 392 in 1999 to 866 last year. Despite these moves the annual deficit had accumulated to some pound;1.15 million by last July.
Graham Johnston, the islands council's head of finance, described the deficit as "a major liability" that had to be both fully understood and tackled.
Mr Johnston suggested using the balance of pound;7.5 million in the council's "general fund revenue balances" - normally used to meet unforeseen financial difficulties - to bail out the college and give it "a clean slate".
However he warned councillors that the college would still have to find at least pound;325,000 extra each year if it wanted to avoid slipping back into the red, and the authority remained the only realistic source of income.
As a result Mr Johnston recommended that the council pay the college's accommodation costs, which amount to pound;368,000 a year, out of the economic development budget. If it could be demonstrated that the college was stimulating economic development, the Scottish Office might be willing to help, he argued.
Meanwhile there are plans at Shetland College to boost its own performance to meet the council's insistence that it balance its books over a three-year period. Student targets are being raised, "robust" management arrangements are being established, strict cost control measures are being introduced and by 2006-07 the college hopes to be finding pound;180,000 a year from alternative sources, such as European funding.
Drew Ratter, chairman of the college's recently formed management board, said the pressure was now on to perform well, but he was optimistic for the future. A move into teacher training was one option, Mr Ratter suggested.