Staff fear a $3.6 million bailout will not stave off job and course cuts at the West Coast's Tai Poutini Polytechnic.
The struggling institute has a Crown-appointed manager and is under investigation for delivering less teaching than it was paid for.
Last month, the government announced it had loaned the polytechnic $3.6m so it could make ends meet.
Tertiary Education Union president Sandra Grey said Tai Poutini's situation was very serious and the union's members were worried there would be job cuts.
"Our members have been expecting major changes in staffing and course provision for quite some time," she said.
"One thing we know is it won't close, which is a good thing, but it could be stripped away to a very hollow shell of itself and that's not good for the community."
Dr Grey said enrolments at the West Coast institution had been falling, but the fundamental problem was small polytechnics did not get enough government funding to cover all their costs.
"We need to have a serious conversation about regional provision and rural provision in New Zealand and certainly look at the the fact you can't actually fund Tai Poutini at the same rate that you would fund one of the metroplitan polytechnics - they just don't have the student numbers," she said.
Dr Grey said small institutions needed extra base funding so they could afford buildings and other infrastructure.
Tertiary Education Minister Paul Goldsmith disagreed.
"Small institutions can be viable, provided they are responsive to the needs of the community and operate in a fiscally sound manner," he said.
Mr Goldsmith said the government's $3.6m loan was needed because of "the significant financial deficit forecast, and falling student numbers, in order for Tai Poutini to remain open".
He said the government was committed to supporting tertiary education on the West Coast.
Tai Poutini managers were not available for comment, but said in a statement they wanted to make a viable and sustainable business model for tertiary education and vocational training on the West Coast.