Welsh government guidance said it generally funded specialist further education placements up to a maximum of two academic years, based on an agreed programme of study.
But lawyers acting on behalf of the family said there was room to challenge decisions about funding for James, and they were applying for a judicial review.
They said delays in rolling out the Additional Learning Needs Act left young people of James's age without the ability to go to a tribunal if they disagreed with decisions about support.
The law started being introduced in 2018, but will not cover young people up to 25 until September 2025.
“A huge volume of the population of the very most needy people in Wales have been left with a very restricted avenue of challenge, which I think is deeply inexcusable and frankly shameful," said Mike Charles from Sinclairs Law.
He argued there should be more flexibility over how long education for young people with complex needs is funded.
"People who have got the most profound difficulties will often require more than two years support - you shouldn't be comparing people with disabilities to the general population," he added.
The next step for James is not clear, but it could be a supported living placement in Cardiff.
His parents are ready to fight for him to carry on in education: "He's really come on and he's got much more to give," said his dad.
The Welsh government said: “We are unable to comment on individual cases.
"We have invested heavily into Additional Learning Needs education to ensure learners are supported in Wales."
Cardiff council also said it could not comment on individual cases but it fully understood the anxiety a family faces when a young person with complex needs finishes further education.
"Where a young person is not eligible for Welsh government further education funding, we will carry out a comprehensive individual wellbeing assessment so that we can identify their needs and put the best care package for them in place," it added.