The charity is calling on the Department for Education and Skills to scrap regulations that prevent anyone over the age of 18 from claiming housing benefit if they are studying for more than 16 hours a week.
A new study published by the federation claims that 50 per cent of those affected by the rule abandon their attempts to gain qualifications such as GCSEs and A-levels, and move into low-skilled work instead.
The Foyer Federation says that its new report, The 16-hour rule - past its sell-by date, demonstrates how this policy is preventing the Government from achieving its targets for widening access to higher education.
"Talented young people, whose family circumstances prevented them from succeeding at school, now find they have no second chance to catch up," said Carolyn Hayman, chief executive at the Foyer Federation. "Unable to study full time for the qualifications that would get them into higher education or well paid work, many face a lifetime of low-paid insecure work, when they could be contributing to the economy," she said.
The federation says that the current legislation is forcing college advisors to lie on young people's behalf by claiming their course is part-time, so that students can keep their housing benefit.
The charity will use the research to lobby MPs at its next All-Party Parliamentary Foyer Groups Meeting later this month.
It says it will also use the opportunity to remind MPs that the Labour Party labelled the 16-hour rule as "perverse and mean-spirited" when it was implemented by the Conservative Government in the mid-1990s.