Figures released under the Official Information Act by the Ministry of Social Development (MSD) showed the number of students on the allowance with Dunedin addresses dropped 23.8% from 6327 in 2012 to 4822 last year.
In New Zealand, numbers on the allowance decreased from 96,908 in 2012 to 85,094 last year, with the figure expected to drop to 82,070 this year.
Labour's tertiary education spokesman, Grant Robertson, said the figures showed Government changes to allowance entitlements - which included keeping the parental threshold down and abolishing the allowance for post-graduate students - were beginning to bite.
The changes were affecting people who most needed the support, he said.
''It just makes it much, much harder for those people from low-income backgrounds to get access to tertiary education.
''Our view is that we should create the opportunities for people to be able to study further, not put up barriers in their way.''
The reduction in student income would also affect Dunedin's economy, he said.
''Any loss in student income like that will have a big impact on Dunedin and that's obviously something for the city to be concerned about as well.''
Otago University Students' Association president Ruby Sycamore-Smith said the figures suggested people could be opting out of tertiary education.
The OUSA would be pushing for more student support in the lead-up to this year's general election.
''The OUSA is in favour of universal student allowances and will be strongly advocating this to all parties in the lead-up to the 2014 election.''
Otago Polytechnic Students' Association (OPSA) president Rebecca Swindells said the figures were concerning.
''OPSA is concerned that some students may be living off less money than is healthy, and notes last year's Massey study that found a third of students have had to change their diet because of financial hardship.
''It is also a concern for the city. Obviously if there are fewer students, or students have less money to spend on their living costs, this will have negative impacts on the Dunedin economy,'' Ms Swindells said.
Minister for Tertiary Education Steven Joyce said the figures did not show post-graduate students were putting off studying because they no longer had access to the allowance.
''We have been monitoring enrolments ... and they haven't changed,'' Mr Joyce said.
He also pointed out the student allowance and loans were inflation-adjusted, meaning students were no worse off in terms of the amount they received than when Labour left office.
