Cash paid to colleges for students' exam results should be cut, or even scrapped, college leaders have recommended.
They fear that output-based funding rewards colleges that recruit only those students most likely to succeed at the expense of widening participation. It also could provide a financial incentive for lowering quality, they said.
The Association of College's submission to the government's consultation on the funding methodology for the Learning and Skills Council criticises the balance of the current system, in which colleges are funded according to student recruitment, retention and achievement.
The AoC recognised that linking funding to achievement could "in many programmes provide an incentive needed to support the drive to lift levels of attainment", but it can be counterproductive.
"Too large a component associated with ... achievement can have an adverse impact on the approaches to the recruitment of learners, on retention and on the stability of providers."
The achievement-based element would be "unnecessary" in some programmes, especially adult and community learning programmes where a recognised qualification is not always the absolute goal. The narrow definition of what constitutes "achievement" should also be reviewed, the AoC said.
Ministers appear willing to consider the abolition or down-grading of output funding. Their consultation paper on post-16 funding recognised: "In the case of outcome payments, too high a percentage can affect the quality of the programme provision."
Research by lecturers' union Natfhe has found that many colleges place too much emphasis on recruitment and retention funding.
Colleges have been found to recruit students to courses "beyond their capability" to win recruitment funding, and have allowed "demotivated and disruptive" students to remain on courses so that they can collect retention cash, it concluded.
The AoC also said that it supported "in principle" a funding element to encourage the recruitment of disadvantaged students, but it warned that using post-codes to identify disadvantage is limited.
Ministers said in the consultation document: "There need be no presumption that these would always be a payment for every element of the funding system. The range (of funding elements) would need to reflect the diversity of provision and of policy intentions."