The college needed approval for the application to build 24 homes - worth an estimated £1.5 million - to trigger £17.3 million of funding from the Learning and Skills Council for the site in Bircham Newton, Norfolk.
The NCC has so far raised £2.8 million out of the total £4.3 million needed to earn the grant.
But at a planning meeting held last night by King’s Lynn and West Norfolk Borough Council, councillors rejected the housing development to be built on land on the eastern side of the site currently used as a car park.
Earlier this year, the Department for Communities and Local Government had rejected plans to build 250 homes on the site.
However in a separate application last night, plans to redevelop the college facilities were approved.
A council spokesman said: "The development plans were contrary to local development policy. The Government had recommended that local planning policy only allowed for five homes to be built on site. There was also no affordable housing in the plans."
"We will look to meet with college officials in the coming weeks to find a solution."