Yesterday, the Government announced the details of a new bursary scheme to replace the Education Maintenance Allowance (EMA). The funding for this will total £180m, of which £15m is reserved for a £1,200 annual grant for vulnerable children (children in care, care leavers and those receiving income support in their own right). The remaining £165m will form a discretionary fund that schools and colleges will distribute to students deemed to have the greatest need. In this observation, we analyse how this fund could be structured and its potential impact on students.

Schools and colleges will be responsible for distributing the new discretionary bursary scheme. Exactly how this scheme will operate is now the subject of an 8-week consultation. A key question for this consultation is how the fund will be distributed to schools and colleges. If it is allocated on a flat-rate for the total number of students at the school or college, then disadvantaged schools or colleges will be able to offer less generous bursaries. So it seems likely that the bursary will be allocated to institutions on the basis of some formula incorporating the number of disadvantaged students enrolled. Another key consideration is whether this bursary fund will be ring-fenced for bursaries only; if not, then schools and colleges may face a financial disincentive to attract disadvantaged students.

How will the new fund change the incentives for students to stay in full-time education? This will clearly depend on how - and to whom -the new bursary is allocated. Firstly, it is clear that with the total pot reduced from £560m to £180m, many existing EMA recipients will get less money than at the moment. Secondly, if students must apply for the bursary after enrolment, then they will not know, when applying for a place in post-16 education, whether they will receive a bursary - and if so, how much. This could have an impact on their decision to stay on in the first place.

The discretion that schools and colleges will have could enable them to distribute the bursary in order to attract or reward certain types of student. For example, it could be given to high-achieving, low-income students - perhaps the type of students who would have stayed in full-time education anyway. Given that high deadweight cost was the reason given for scrapping the bursary's predecessor, one presumes that the government would want to avoid this outcome.

Given this uncertainty, we can't say in advance which students would receive more or less under the new scheme. Schools could choose to allocate more to some students than they receive at the moment, and less to others. However the Secretary of State for Education, Michael Gove, said that the new bursary scheme "would allow £800 for every child eligible for free school meals who chose to stay on - more than many receive under the current arrangements." Under the current arrangements, children with household incomes less than £20,817 are entitled to a full EMA payment of £30 per week (or £1,170 per year). By comparison, to be eligible for free school meals, their household income cannot total more than £16,190. In other words, any children on free school meals are currently entitled to the full £1,170 for EMA, if their circumstances do not change. It must be the case that most such students would be worse off under the bursary scheme that they would have been under the EMA - on average, to the tune of £370 a year. Furthermore, allocating the bursary fund in this way implies that other EMA recipients not currently eligible for free school meals would in future receive nothing.

The government as ever will be facing a dilemma in looking to provide more discretion to front-line providers over how they allocate the money made available. This could allow (the smaller amount of) money available to be better targeted at those who would benefit most. But if the discretion is used, it could reduce transparency and certainty for students. The system will also need to be carefully designed to avoid perverse incentives.