Minister for Education Ruairi Quinn has said it is reasonable to ask those applying for additional taxpayers' money whether they were compliant with a legally-due tax.
He said he expects other councils to follow Clare County Council's decision to send letters to third-level grant applicants asking them to submit proof they have paid the Household Charge.
Mr Quinn said the council made the move on its own initiative and the department was not involved.
Clare County Council said that processing higher education grants is done at a cost to the council and it was its policy to ensure that benefactors of such services pay the Household Charge as required by law.
The council said any delay in processing grant payments is regretted.
It added that early payment of the charge would ensure no unnecessary delay in the payment of the grants.
A council spokesperson was not able to say if non-payment of the Household Charge would actually result in grant applications not being processed or being refused.
The Taoiseach said it was quite in order for Clare County Council to establish whether households were in compliance with legal obligations to pay the charge when processing grant applications.
Speaking in the Dáil, Enda Kenny said the same process applied for those seeking planning permission for extensions to their properties.
He said that Clare County Council was entirely within its rights and that it was unfair to suggest that the vast majority who had paid the Household Charge would not expect others to do so.
Socialist Party TD Joe Higgins had asked if there had been a secret statutory instrument given to county councils to collect the charge in this way.
The Taoiseach said there was no such secret statutory instrument.
People Before Profit Alliance TD Richard Boyd Barrett TD asked if Clare County Council had the legal authority to refuse grants to students where parents had not paid the charge.
Mr Barrett said he had understood the only legal basis for refusing grants was eligibility or non-eligibility for the criteria.
Around 30 students from colleges in Galway and in Limerick protested outside the offices of Clare County Council.
The students travelled from NUIG in Galway and LIT in Limerick.
Student leaders said students and their families were shocked to learn the council had linked the payments of the charge to qualification for education grants.
They said many students and their families were struggling to meet the charge and the cost of college, and it was a disgrace a council would withdraw student support.
They called on county managers to withdraw the threat of withholding student grants and said it made a nonsense of Government promises to make third level education universally available.
South Tipperary County Council has also said it is asking for evidence that Household Charge has been paid and payments to higher education grant applicants would not be made until they get confirmation.
Cavan County Council has said it is considering asking students seeking grants for proof that the charge has been paid.
A spokesperson for the local authority said this and a number of other options are being considered by the council in relation to the charge.
Meath County Council has said it has no plans to ask students for such proof when seeking grants.
Louth County Council has said it is collecting the charge "in line with agreed procedure" and is not adopting the same position as Clare County Council.
Kildare County Council said it has not made any decision, while Longford County Council is expected to discuss the issue tomorrow.
Clare council accused of scare tactics
Speaking on RTÉ's Morning Ireland, Pamela Rochford, spokesperson for the Clare branch of the Campaign Against Household and Water Taxes, accused Clare County Council of using scare tactics.
Also speaking on the programme, Fianna Fáil leader Micheál Martin said the council was "out of order" in asking whether third-level grant applicants or their parents had paid the charge before processing grants.
Mr Martin said that while he believed that people should pay the charge, students should not be victimised. He also questioned the legality of the move by Clare County Council.
He said education was central and of value, and we should not allow it to be used and exploited by those with other agendas.
The Union of Students in Ireland criticised the move and said young people must not be penalised for their parents' decisions.
USI President John Logue said the decision was unprecedented and described it as a "particularly cynical and craven way to manage a Government".
Sinn Féin's education spokesman Jonathan O'Brien said the move "is likely to be a breach of the rights of applicants to be independently assessed for a grant".
The Teachers' Union of Ireland described the decision as grossly unfair.
TUI General Secretary John MacGabhann said any delays in grant payments could have serious repercussions for students.