Graham Lane, chairman of the Government’s advisory group on student support, said proposals to abolish local authority discretionary grants would be ready to be incorporated into university fees legislation by the end of March.

Instead, teenagers would be entitled to travel or maintenance allowances, depending on their circumstances. Hard-up students over 19 would be entitled to help with childcare.

Mr Lane said: “We are very close to a new scheme using the present money in a more targeted way. We will have something which is affordable and achievable. It could be a great achievement.

“We are looking for something which is administered locally, but with a national element.”

Education minister Baroness Blackstone has already indicated that reform is planned, a move which would be widely welcomed by college and student leaders.

Funding would come from cash which is currently being used for student support in more piecemeal ways, such as the waiving of fees for unemployed people, access funds, discretionary council grants and transport subsidies.

Mr Lane said Pounds 187 million would come from local authority grant budgets, Pounds 83m from the Further Education Funding Council, around Pounds 8m from access funds and more from transport budgets around the country.

And he said talks were under way with Treasury officials to match Pounds 200m of local authority and other money with Pounds 200m from central Government to create a student support fund.

Mr Lane said his recommendations enjoyed “near unanimous support” from his advisory group, and expected them to be incorporated into the Teaching and Higher Education Bill in the Commons.

At present discretionary grants vary greatly across the country, and have been a prime target for council cutbacks, leading to widespread calls for reform.

News of the plans comes as the Government prepared to rerun part of the committee stage of the Bill to avoid a House of Lords defeat.

Liberal Democrat Lord Tope has tabled a motion calling for part two of the Teaching and Higher Education Bill, which deals with the introduction of student loans and tuition fees, to be recommitted, and with support from Tory peers is expected to win the vote.

Baroness Blackstone is unhappy with the idea of an embarrassing concession, but Government sources suggest a deal will be reached. As a compromise, the Government could agree to rerun a number of clauses on February 23, when the report stage of the Bill is due to be heard. This would cause a week’s delay for a Bill which is already on a tight schedule to become law in time for the introduction of fees and loans this October.

Opposition peers say the legal basis on which tuition fees can be introduced was not made clear during the committee stage. Lord Tope said: “Now the legal basis is agreed, we need a second chance to be able to make probing amendments to seek clarification.”

Lady Blatch, for the Conservatives, said there was a disgraceful lack of detail in the Bill which gives the Secretary of State great powers to make law by regulation.

The Government still faces a number of possible defeats. Clause 18, which gives the Education Secretary powers to withdraw funds from universities which charge top-up fees, could be voted out and amendments to ensure teachers form the majority on the General Teaching Council could be passed. The Government could also be defeated on the introduction of tuition fees.