Colleges are up to #163;500 a year worse off for each student enrolled under the Government's New Deal compared with what they would have got for the same recruits under the old funding rules.
But many managers see the initiative as a worthwhile "loss leader" which attracts new students. Colleges also say they are having to cope with considerably more bureaucracy and timetabling problems to deliver the New Deal to thousands of unemployed people.
Four months after the Government's key welfare-to-work scheme went nationwide, colleges are bracing themselves for an influx of new students, as hundreds of trainees finish their 16-week induction period and sign up for one of four work and training options. Continued payment of welfare benefit depends on their taking one of the four options.
Government figures this week show that 1,640 people opted for full-time education and training in July, bringing the total so far to 3,550. But the cash received under the Employment Service-funded initiative is significantly less than would have been paid for the same student under Further Education Funding Council rules.
Jenny Shackleton, principal of Wirral Metropolitan College, and a member of the Government's New Deal task force, admits to "a financial disincentive", exacerbated by colleges having to pay for all New Deal course materials.
Wirral was one of the 12 New Deal "pathfinder" pilot areas in January. The college won the local contract to guide trainees through the induction or "gateway" period, and has set up personal development programmes to help ease the return of the long-term unemployed to education. But the investment pays off in terms of wider participation, she said.
Melanie Hunt, assistant principal of Eastbourne College, another pathfinder area, said: "These learners may be encouraged or required to go elsewhere if we didn't participate and therefore any funding would be lost to us completely. " Eastbourne was one of many colleges contacted by The TES this week which said the New Deal had offered previously excluded people a fresh start.
Some college managers said extra bureaucracy was hampering their efforts.Up to 13 forms have to be completed by hand for each trainee compared with the FEFC's individualised (and computerised) student records.
The one-year limit on New Deal-sponsored courses discriminates against students who might benefit from two-year programmes, such as advanced GNVQs, or those whose first language is not English.
Some colleges report that trainees arrive with unrealistic expectations, having been poorly advised and inaccurately assessed. John Brennan, head of FE development at the Association of Colleges, said that the New Deal was not the seamless "fill-in" provision its architects envisaged.
"There certainly have been teething troubles with it. Colleges have bid blind in many cases without having any real idea of likely numbers or needs of the students."
The roll-on roll-off programme required by the New Deal clashed with colleges enrolment schedules and awarding bodies' exam dates. New enrolment systems and consortium arrangements were being introduced to ease the problems.