Plans circulated to a select group of education experts suggest the much-criticised grants could be replaced with an expanded system of access funds, which are currently administered by universities and colleges but paid out by education funding quangos.
Education minister Baroness Blackstone discussed the proposed reforms at meetings with local authority leaders last month.
Colleges and student leaders immediately welcomed the proposals, arguing the current system was inconsistent and prone to ever-deeper local authority cuts.
But Lady Blackstone may face fierce opposition from councils, who want to retain powers to award grants, claiming local decisions are needed to meet local demands.
A letter from officials to bodies representing schools, colleges, universities and students hints strongly that ministers want more cash to be channelled into access - a key part of the recommendations of Sir Ron Dearing's report on higher education and Helena Kennedy's report on further education.
The letter, from Beverley Evans, 16-19 student support manager at the Department for Education and Employment, says: "The minister is concerned about the variation in the number and value of discretionary awards made by local authorities around the country.
"She is also concerned at the continuing decline in the number of awards and in overall expenditure: there has been a 20 per cent decrease in the number of awards and around 25 per cent real terms decrease in expenditure on awards in 1995-96 compared to the previous year, from Pounds 135 million to Pounds 102m. This decline has been most marked in HE awards."
Plans being considered by ministers involve removing councils' power to make grants, cutting their spending limits accordingly. Cash would come from increased access funds provided by the Further and Higher Education funding councils.
John Brennan, policy director of the Association of Colleges, which has long pressed for a change in the law, said he was delighted.
The National Union of Students welcomed it as a step towards supporting more FE students.
But Graham Lane, education chairman of the Local Government Association, warned councils wanted to retain grant-giving powers. He said: "It's essential that local authorities have a key role in the policy and possibly the administration as well. We are very keen to talk about certain cases, but there has to be room for discretion because of local issues."
The Government review will also focus on access fund priorities, an area where policy varies considerably across the country.
A survey published earlier this month showed life was still a lottery for dance and drama students despite a scheme designed to help those wanting discretionary grants to fund arts-based courses - and area hit hard by local authority cuts.
The Arts Council scheme involved topping up Pounds 10m for arts education grants from the Department for Education and Employment with Pounds 25m from the National Lottery.
Jennifer Edwards, director of the National Campaign for the Arts which surveyed the scheme, said there were still great regional variations. Almost three-quarters of councils in the North and almost two-thirds in Yorkshire and Humberside were not offering support.
She added that the scheme had not been very successful in providing support for talented students to train, regardless of where they lived.