Improved education and care for looked-after children would eventually save the Government more than pound;16 billion a year - half of England's education budget.
The savings would come from reduced crime levels, better health and improved employment prospects - which are a direct consequence of a better education, a study commissioned by the Westminster government's social exclusion unit found.
The findings emerged as Education Secretary Ruth Kelly announced that children in care will be guaranteed a place in their first-choice school, even if it is full.
Ms Kelly gave her personal backing to The TES Time to Care campaign as she announced the move, which campaigners said could have a huge impact on the education of looked-after children.
However, the Assembly government has decided against adopting the change, which is expected to be incorporated into the Education and Admissions Bill currently before Parliament.
A spokesperson said the Cardiff government would need to consult on any proposals before bringing forward legislation, but that it wanted to encourage stability for looked-after children. Most children in Wales go to their local school, she added.
Government-commissioned research by London university's Thomas Coram research unit found almost a quarter of children in care had dropped out or been excluded from school before taking their GCSEs, and more than a third were homeless within five years of leaving care.
Care-leavers make up a quarter of the prison population, and growing up in care makes young people 10 times more likely to be excluded from school and 66 times more likely to have their own children taken into care.
Official figures show more than half leave school without a single GCSE, and only one in 25 Welsh care-leavers achieved five or more A*-C grade GCSEs last year.
The most effective way of improving the prospects of looked-after youngsters would be to improve the educational achievements of their carers, says the study. Social services departments are not required to look at potential foster carers' educational backgrounds, nor give guidance on schooling.
Professor Sonia Jackson, from the Thomas Coram unit and a former chair of Children in Wales, said: "We are only short of foster carers in this country because we pay them peanuts. In France you need 240 hours' training every year. In this country you don't even have to be literate."
Some foster homes were found to have nowhere suitable for doing homework, while in residential care homes computers were sometimes reserved for staff use only.