The Government has announced that it is cutting the funding of both Commonwealth and Chevening scholarships

For Canadian-born Dr Heather Bell, winning a Commonwealth scholarship to do a DPhil in the UK was "transformative – professionally, academically and personally".

Academically, it allowed her to study with the world expert on her DPhil topic, on which she published a book. Professionally, it helped to secure her a job at the consultancy firm McKinsey, which identified scholarship winners as a good source of recruits; and personally, it landed her a husband, a fellow-academic whom she met on her second day as a student at Oxford University.

It later also proved a boon for Oxford, where, in March last year, she became its first director of international strategy. In this role, she now faces the fallout from a government announcement that means Commonwealth scholarships will no longer be available to her present-day equivalent. From 2009, the contribution made by the Foreign & Commonwealth Office to these scholarships – now £2.05m a year – will be cut, meaning that students from developed Commonwealth countries, such as Canada, Australia, New Zealand and Singapore, will no longer be eligible for them.

On top of that, the £32,289,000 budget for the Chevening scholarship programme, which now funds around 1,370 students identified as future leaders from all over the world, is also to be slashed next year by nearly 25 per cent.

The decision has caused an outcry among many in higher education, prompting seven written Parliamentary Questions on the issue, an Early Day Motion, tabled by the Tory MP Tim Boswell, and protest letters from a number of vice-chancellors to the Foreign Secretary. Representatives from Universities UK met the Foreign Office minister Jim Murphy last week to discuss their concerns.

Particularly vocal are the Russell Group universities, where most of the Commonwealth scholars study. Last year, Oxford alone welcomed 77 new Chevening and 27 Commonwealth scholars. "Many of my colleagues in the university are dismayed, and I personally am hugely dismayed," says Dr Bell. "The scholarships in question have been a rich source of talented students for Oxford."

Just how talented are the scholarship students, who come to study at Oxford and elsewhere, is clear from what they go on to do after graduating. Commonwealth scholarship alumni include George Brandis, who was minister for arts and sport in Australia; Michael Cullen, deputy Prime Minister of New Zealand; and Hakki Atun, former Prime Minister and Minister of Education in Northern Cyprus. In education, they have included several heads of higher-education institutions, including George Bain, former president of Queen's University, Belfast, and the former principal of the London Business School. Dame Bridget Ogilvie, former director of the Wellcome Trust in the UK, was a Commonwealth scholar, as was the radiologist Michael Sage, and the writer and broadcaster Germaine Greer.

Malcolm Gillies, vice-chancellor of City University, who was a Commonwealth scholar at Clare College, Cambridge and then King's College London in the early Eighties, says that, in the short term, the experience helped to secure him a job as a tutor in music back in Australia, and laid the basis for his PhD. "In the longer term, was there a return on investment? – well, I came back after 25 years and am running one of Britain's best-placed universities, so I hope I am giving good RoI. Academically, it set me up with many acquaintances who still remain research colleagues."

He has mixed feelings about the news that money for the scholarships is to be cut. "It is very sad that the opportunities for the old Commonwealth countries to send their young scholars is reduced," he says. "But these countries have themselves sometimes pushed away, as well, so it is not all on one side."

David Miliband, the Foreign Secretary, announced in March that the Foreign & Commonwealth Office was to cut £10m from its contribution to international scholarship schemes to free up money for programmes to combat climate change. But he argued that it was time to change the way these schemes operated anyway. The number of postgraduate students coming to the UK from outside the EU had gone up by 160 per cent over the past 12 years, he said, with many British universities actively marketing themselves to overseas students, including offering their own scholarships.

He continued that it was therefore necessary "to focus on the value-added from the FCO's scholarship schemes". This he identified as "the creation of relationships between the UK and the international leaders of the future". Reviews, he said, had identified weaknesses in the schemes. Their purpose had not always been clear, the students chosen had not always been those most likely to become international leaders, the desire for quantity of students had sometimes overcome desire for quality, and selection and support of students was not as good as it could be.

The upshot was that, while the Department for International Development would continue to support the Commonwealth scholarship scheme for students from developing countries, the FCO would restrict its scholarship contributions to the Marshall scheme for students from the US, and Chevening for the rest of the world. In future, scholarships would focus "on those countries such as China and India that are going to be most important to our foreign-policy success over coming years", said Miliband, and heads of mission would become personally responsible for making sure scholars had future leadership potential.

But John Tarrant, secretary general of the Association of Commonwealth Universities, which provides the secretariat for the Commonwealth Scholarship Commission, argues that these decisions have been made on the wrong grounds. First, criticisms made in reviews of the scheme applied only to Chevening, he claims, not to the Commonwealth scholarships. Moreover, he argues that Commonwealth scholarships are no less likely to produce future leaders than Chevening. In fact, he suggests their selection processes are more rigorous, involving academic experts in the UK rather than relying on Civil Servants.

He is also concerned by the suggestion that the UK should award scholarships for overseas students to attend British universities for altruistic and political rather than for academic reasons. "It isn't about the UK providing these scholarships, it's about providing a mechanism to persuade high-quality doctoral students to come to the UK, and about maintaining academic and professional contacts with really high-quality people into the future," he says.

This is why the changes have caused such upset in universities, which are facing increasing competition to attract top international students. The Prime Minister's Initiative for International Education, a five-year plan launched in 2006 to promote the UK as a leader in international education, explicitly recognised the challenges they face.

Diana Warwick, chief executive of Universities UK, argues that the cuts seem to contradict the initiative. "Many scholarship students go on to be leaders in their fields and maintain invaluable links with our universities, and the UK as a whole," she says. "This decision means they will study elsewhere, which will be a real blow to the UK's reputation."

Wendy Piatt, director general of the Russell Group, argues that while the cuts won't save much for the Exchequer in the short term, they could have significant long-term costs in undermining the strength of the UK on the global stage in terms of innovation and academic partnerships.

What particularly concerns critics is the effect on top-level science, which is experiencing a steep decline in the number of doctorate students from the UK. Unlike Commonwealth scholarships, the Chevening programme does not cover PhD students, and only a small percentage of the Masters students it covers are studying science.

Dr Bell says that there is already a big competitive gap between American universities, where students can attend a fully funded PhD programme, and British universities, which cannot offer the same. "It's a real issue for us," she says. "To have a high-prestige, high-value, academically rigorous scholarship scheme cut sends the wrong signal and makes the gap that much wider."

Dominic Scott, chief executive of the UK Council for International Student Affairs, says it is important to remember that most scholarships are provided by universities themselves, so international students won't be entirely bereft. But he warns that the UK is already seen as an expensive place to study. "If it is to continue to retain its reputation as a welcoming destination, it is essential that we maintain a generous level of scholarship provision," he says. "In that context, this is a sad move."

Also galling for the universities is that seven years ago, they agreed to subsidise fees for Chevening scholars on the understanding that their numbers would increase from 2,000 to 3,000 per year. This year, the number of students was under 2,000, and once the cuts are implemented, they are expected to fall to nearer 900.

To make matters worse, next year is actually the 50th anniversary of the start of the Commonwealth scholarship scheme. To mark the anniversary, a huge fundraising effort is being launched to enable developing countries to offer their own Commonwealth scholarships. Fundraisers now face trying to secure donations from alumni from the richer Commonwealth countries, while telling them that the scheme under which they benefited themselves has been scrapped.

Michael Spence, the new vice-chancellor of the University of Sydney, who can doubtless expect to be one of those alumni tapped for a donation, says that the scheme should continue in its current form.

"It is not simply an aid programme," he says. "It constitutes a real intellectual exchange between the young people of countries committed to working together globally, and Britain's support for the programme is something of which it should be proud."