The National Weather Service issued a flood warning for Blackwater Creek below the dam until 3.15pm local time (8.15pm BST).
If it fails completely, the water depth in Lynchburg could exceed 17 feet in 7 minutes.
"12 to eight inches of water are flowing over Lakeside Drive into Blackwater Creek".
Local fire and police were sending boats to rescue people to area shelters. The city owns the dam, but the university owns the lake.
City officials posted pictures Thursday of rescuers using a raft to take families from a flood-threatened apartment complex as well as the partial collapse of one road into an adjacent creek. "This remains a risky situation".
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"The good news is that the rain has stopped and began to recede yesterday, relieving some of the pressure on the dam", Major Tommy Carter of the Lynchburg Sheriff's office told Fox News on Friday, "but the bad news is that there's more rain in the forecast today and the dam has been weakened".
The weather service issued a flash flood watch in effect until 6pm Friday, as additional showers and thunderstorms with heavy rain are possible.
The heavy rain in Virginia is part of a sprawling weather system bringing the threat of flooding all the way from the Carolinas to New England.
College Lake is a manmade lake, built in the early 1930s by the Virginia Department of Highways as part of the development of U.S. Highway 460, west of Lynchburg.
Lynchburg Water Resources is working with the University of Lynchburg to deal with this situation.
There is some good news in the forecast: Following two weeks of relentlessly wet weather in the eastern USA, a drier weather pattern will move in over the weekend and into early next week, AccuWeather said. The National Weather Service said up to 15 centimetres of rain fell within hours, filling the dam beyond capacity.