IT services firm Liberata has been fired by the Learning and Skills Council for failing to process hundreds of thousands of student grant applications on time.
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News of the contract termination came on Radio 4's Today programme this morning and it is believed to be because of a computer system failure.
An alternative company is said to have been lined up to take over the delivery of the delay-hit education maintenance allowance (EMA) grants, BBC News reports.
Tens of thousands of students are still waiting for payments, more than two months after the beginning of term.
The allowances are paid to around 600,000 teenagers from low-income families. They are an incentive to keep them from dropping out of education.
The contract to deliver the allowance and other payments is worth over £1m a month.