Education maintenance allowance (EMA) will be scrapped in order to fund the compulsory education and training of all under-19s.
A replacement programme of targeted support for those most in need is likely to have a budget just a fraction of the size of EMA, as the Government seeks to save pound;500 million of the total pound;574 million budget.
George Osborne, the chancellor, told the House of Commons: "We will fund an increase in places for 16 to 19-year-olds, and raise the participation age to 18 by the end of the Parliament - and that enables us to replace education maintenance allowances with more targeted support."
The Department for Education justified the decision by saying that evaluations of the allowance showed that 90 per cent of the money was "dead weight", going to students who would have attended anyway.
But an Institute for Fiscal Studies report said EMA was a significant factor in improving staying-on rates in education, particularly for boys and for the poorest students. It said it had boosted participation by around six percentage points.
Child benefit for 16 to 18-year-olds, which is also claimed by parents wealthier than EMA claimants, is to be retained at a cost of pound;1.8 billion.
It is also not clear if the pound;500 million saving will be enough to fund full participation by under-19s by 2015, as the Government has promised. The former Department for Children, Schools and Families estimated the cost would be pound;774 million, while Professor Alison Wolf, now recruited by the Government to review vocational education, estimated that the real figure could be double that, at pound;1.5 billion.
While the total budget for 16-to-19 education will increase in real terms, increased participation will cause the funding per student to fall, the chancellor admitted.
The Association of Colleges (AoC) has called on the Government to protect its members' budgets and reduce the higher rate of funding for schools first.
A source in the Department for Education said they were "sympathetic" but no decision had yet been made about how to implement lower rates of funding, or modelling carried out on the impact for individual schools and colleges.
Colleges are particularly concerned about EMAs because they teach 69 per cent of students receiving support. In some, such as Joseph Chamberlain Sixth Form College in Birmingham, more than three quarters of students come from families earning under about pound;20,000, and are eligible for the maximum grant.
Julian Gravatt, assistant chief executive of the AoC, said that tackling inefficient small school sixth forms and levelling funding between schools and colleges could save pound;250 million.
He said: "We are concerned about the prospects of students from poorer families following the announcement of the withdrawal of the educational maintenance allowance and would like to see more detail about what is meant by `more targeted support' for these young people.
"The Association of Colleges suggests the Government should protect education maintenance allowances for young people from the most disadvantaged backgrounds by tackling inefficiency in small school sixth forms and closing the funding gap between schools and colleges."
Sally Hunt, general secretary of the University and College Union, said: "We are appalled to learn that education maintenance allowances are at risk. The simple message here seems to be: `Don't be poor'."