The House Education Committee passed the bill on Monday night with a 7-6 vote.
The measure's prospects are not as good in the Republican-led House, where a similar measure failed last year.
The proposal would let illegal immigrants who graduate from Colorado high schools attend college at a rate lower than the out-of-state price but slightly higher than the in-state rate. The students must sign an affidavit saying they are seeking legal status.
The bill has already passed the Democratic-led Senate.
This is the sixth time Colorado lawmakers have debated the issue.
Dozens of people testified both for and against the bill.
At Monday's rally, a student who identified herself only by her first name "Ana" shared the frustration of graduating from high school and winning scholarships, only to lose them when she couldn't provide a Social Security number.
"When it came time to close the deal, we had to tell them that were undocumented." the student said. "They had to rip out of our hands what we have earned so hard. We worked our butts off in school. Do you think that's fair?"
Opponents say the bill aims to circumvent federal law.
"Emotion should have nothing to do with this decision although we feel a great deal of emotion about this issue," Rep. Carole Murray (R-Castle Rock) said. "But when it comes to the law, we must follow the law."
Thirteen states, including Texas, California, Illinois and Connecticut, have passed legislation granting in-state tuition for immigrant students, according to the National Conference of State Legislatures.
Under this year's bill, Colorado students who are illegal immigrants would not get in-state tuition, which includes a state subsidy. An illegal immigrant student attending the University of Colorado at Boulder, for example, would pay about $9,500 annually, compared with an estimated $7,700 for Colorado residents and about $28,850 for non-Colorado residents.
The proposal allows colleges and universities to decide not to participate. But many have expressed support, including the University of Colorado, Colorado State University and the state system of community colleges.
(KUSA-TV © 2012 Multimedia Holdings Corporation with The Associated Press)