The report, Educational opportunity in Australia 2015: Who succeeds and who misses out, from the Mitchell Institute found about 26 per cent of young people did not complete their Higher School Certificate before the age of 19.
The report also found only 44 per cent of Indigenous students completed Year 12, or an equivalent, by 19, versus about 75 per cent of non-Indigenous students.
Students from low socio-economic backgrounds and those attending rural or remote schools were also less likely to complete high school than more privileged and better located students.
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The report, from the Centre for International Research on Education Systems (CIRES) for the Mitchell Institute, found that for the children that fell behind it was increasingly more difficult to catch up.
Mitchell Institute Director, Dr Sara Glover, said the findings confirmed there were significant differences in the educational opportunities offered to some young people.
"There are many positive opportunities offered by our education systems in Australia, particularly the capacity for some young people who are struggling at one milestone to catch up later on,” she said.
“But overall, the findings show that Australia’s education system is simply not working for a substantial number of young Australians and unlike other comparable countries, like Canada and New Zealand, our current education model is actually compounding educational disadvantage, instead of addressing it.
"As a nation, we are failing to realise the potential and talents of too many young people."
The report found only 61 per cent of students from a low socio-economic background completed high school, and only respectively 43 and 56 per cent of very remote and remote students.
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Dr Glover said the education system needed to change to allow students to reach their full potential.
"This is essential for our economy, our global standing and for the wellbeing of communities across Australia," she said.
"Other countries have already embarked on these changes. Australia risks slipping behind if we don't change our priorities and make our education and training system the best it can be."
The report found Indigenous, remote and very remote students, as well as those from low socio-economic homes, were behind in all four key education indicators: readiness for school, succeeding in the middle-school years, completing high school by age 19 and being engaged in further education, training or work by age 24.
Only 41 per cent of Indigenous students were engaged in further education, training or work by the milestone, compared to 74 per cent of non-Indigenous students.
Students with at least one parent who had attended university were more likely to take part in further education, and those whose parents did not complete Year 12 were also more likely to follow their parents' example, the report found.
The report's lead author, and education expert, Professor Stephen Lamb said the study helped to better understand the scale of the challenge facing the education system.
"Through this study we can pinpoint who is missing out on the opportunities education can provide and at what stage,” he said.
“We can also see that it is possible for young people who are missing out to gain ground; but the system makes it so much harder for disadvantaged students.”
