Looked-after children should be cared for by grandparents or other family members to try to break a vicious cycle in which successive generations grow up in care, the Liberal Democrats will say.
Children whose parents were looked after by local authorities are 66 times more likely than their peers to be taken into care. But grandparents who offer to take over long-term care are not entitled to the same payments as other foster carers.
A Lib Dem policy paper to be published in the next few weeks will call for better support for "kinship carers" and say looked-after children should, where possible, be placed with members of their extended family.
"As many grandparents are either on low incomes, pensions or in full-time work, looking after grandchildren leads to financial difficulty," it will say.
The paper backs several proposals set out in The TES Time to Care manifesto published in April, including continued foster care for young people beyond the age of 16 and better training and support for foster carers.
The Lib Dems also want schools to be given a specific duty to promote the educational attainment of looked-after children; greater support in school including small classes in literacy and numeracy; and intensive fostering for those with the greatest behavioural problems.
Official statistics show more than half of children in care leave school without a GCSE.
Annette Brooke, MP for mid-Dorset and north Poole, said: "We have to make this the highest priority. We have let down a large number of children for so many years, we cannot afford to waste any more time."
The Children and Families policy paper will call for support for parents who choose to stay at home; improvements in the quality of childcare; and better training for parents. It will be discussed at the party's annual conference in September.