Some firms say their recruitment rates have halved since the education maintenance allowance (EMA) was extended to thousands of work-based students last April. Previously, the allowances were only paid to post-16 students at school or college.
The changes have hit those enrolling on work-based learning programmes, such as Entry to Employment - designed to help the most disadvantaged teenagers gain work.
Providers say trainees are now worse off as the means-tested grant is between pound;10 and pound;30 a week, replacing the pound;40-a-week minimum training allowance.
Students are also put off by the bureaucracy involved in applying which requires information about household income. Some are dropping out because of uncertainty over their entitlement and delays in payment. Companies also report worse attendance and discipline difficulties. Under the old system trainers made the weekly payment directly, allowing them to use the money to motivate trainees.
The Association of Learning Providers has compiled a dossier of complaints from its members and handed it to Phil Hope, the skills minister. It warns that falls in enrolment are making some Entry to Employment programmes unviable.
Paul Warner, the association's operations manager, said: "We have been warning for some time that something was going to go awry with EMAs in the work-based learning sector.
"It's one thing trying to roll it out in further education, where students haven't received anything before. With work-based learning, you could get pound;40 a week and now there's a possiblity that you might get nothing.
There's a bit of a design flaw in the policy."
Bridge Training, in Gloucester, which offers an Entry to Employment scheme in construction and plastering, estimates that it will only reach half of this year's recruitment target of 178 trainees, most of whom leave school with no GCSEs or come from the youth offending service. A spokeswoman said that where they used to pay trainees pound;40 a week as if it was a wage, they now arrive to face an allowance information pack.
"They don't understand the forms," she said. "A lot of the people who are in the NEET (not in employment, education or training) group from our experience, have parents with basic skills and therefore actually completing the forms is difficult."
She said under the old system, trainees could be paid bonuses to reward good attendance. "Discipline and control over the group is becoming more difficult for the tutors, and it's more stressful trying to manage them,"
Another of the city's providers, the Furniture Recycling Project, is also struggling to meet its recruitment target. Before April it was recruiting up to 25 students at a time. It now has 14.
"Some who haven't received any money for eight weeks have decided to withdraw," said the charity's chief executive, Ian Ellis. "It's an extremely difficult time. We are reviewing our provision on a month-to-month basis."
A Department for Education and Skills spokesman said the new payments redirect support to those who most need it and that the poorest families get a better deal. Unlike the Minimum Training Allowance, the EMAis paid in addition to other benefits. "The Learning and Skills Council is working closely with training providers to support them and enable young people to get applications right first time," he said.
"They are working actively with the sector to attract more young people onto programmes. Recruitment figures are broadly in line with those for 20045 and have recently increased. Providers must provide a personalised training programme built around the needs and aspirations of learners to attract more young people."