Sixth-form students who regularly go to school will be paid up to £30 a week as an incentive to stay, the Education Secretary Charles Clarke announced today.
The "earn as you learn" scheme will be means-tested but has been hailed as a way of reducing the UK's post-16 drop out rate.
In pilot projects, attendance of 16-year-old boys rose by 6.9% while participation for 16-year-old girls increased by 5.9%.
Mr Clarke urged all eligible Year 11 students to apply for the new Education Maintenance Allowance (EMA) to try to improve the "appalling" records.
At the national launch of the scheme in London, he said: "The UK has one of the highest post-16 drop out rates in the western world.
"This Government is determined to smash school drop out rates at 16 and boost the aspiration and opportunities for those young people who have never viewed staying on at school or college as something for them.
"There is no point having improving GCSE results and higher education participation rising towards 50% if there remains a huge chunk in the middle that continue to drop out and enter into a cycle of continuous low paid work or unemployment."
Mr Clarke said EMAs would "help replace the 'culture of dropping out' at 16 with a 'culture of getting on'."
It is estimated that 353,000 of the total 666,000 of 16-year-olds in the UK would be eligible for EMAs in 2004 and 2005.
The pilot schemes have been carried out in 56 local education authorities (LEAs) since 1999 and involved 120,000 Year 12 students largely from economically deprived areas.
The Institute for Fiscal Studies (IFS) and University of Loughborough estimated the staying on rate had risen by 10% in the most deprived areas.
EMAs will available across the country as of September this year.
Anyone who lives in a house where income is £30,000 or less will be eligible for the means tested payments which will vary between £10 and £30 a week.
Bonuses of £100 also could be given out to students who stay on their courses and demonstrate advances in learning.
Mr Clarke said the allowance was "revolutionary" because it would be paid straight into the student's bank account rather than LEAs or colleges.
But he warned that the money would only be paid in return for regular attendance.
"EMAs are not money for nothing," he said. "You only earn if you learn. The weekly payments depend on the young person being able to demonstrate that they are committed to turning up and working hard.
"If you stop learning, then you stop earning."
He went on: "EMAs will produce the biggest increase in 16-18 participation in a decade.
"Based upon the IFS evidence we project that by 2006/7 EMA will be causing an additional 72,000 young people to be participating in further education every year than would have done before EMA was introduced.
"That is over 70,000 young people in education, the vast majority of whom would otherwise have been in dead-end jobs with no training or self development at best and unemployed at worst."
The move was welcomed by both the National Union of Teachers (NUT) and the National Association of Schoolmasters Union of Women Teachers (NASUWT).
Olive Forsyth, from the NUT, said: "We welcome it. This would allow 16-year-olds to have some sort of income and to continue their education.
"There used to be discretionary grants which were effectively wiped out by the Conservatives - this seems to be a suitable replacement."
Chris Keates, from the NASUWT, added: "We have actually been quite supportive of the whole scheme.
"It enables pupils to maintain their access to further education and so we have not experienced any difficulties with the EMAs.
"As long as there is no administrative or bureaucratic burden on the schools and there doesn't appear to be, then the principle as far as we are concerned is to be supported."Reuse content