The city currently spends some Pounds 1.8 million on placing 33 young children in residential schools at an average cost of Pounds 55,000 each.
A study by Barnardo, found the lack of an educational placement was frequently the key reason they were sent away from home. The pupils display a range of challenging behaviour.
A pilot community-based project for 15 pupils will aim to offer more secure education locally. It is being sponsored jointly by the education and social work departments and Barnardos.
The city wants to launch the alternative to residential school in November with seven staff. It will try to find suitable carers in the community and provide more appropriate education.
The council hopes children will eventually be able to stay with their own families or other carers, keep their places in mainstream schools and experience increased stability in their family life and school.
Around Pounds 85,000 is coming out of the education department special education budget to co-fund the scheme.