This report was prepared to determine lenders' rates of return or profitability on Stafford loans in their portfolios, reasons for varying levels of profitability among institutions that hold such loans, and the effect of 1986 subsidy reductions on these lenders' profitability. The study focused on the activities of lenders that purchase Stafford loans in the secondary market. Ten major loan holders in the three main kinds of secondary markets for student loans were studied: (1) commercial banks (Chase Manhattan Bank and Wachovia Bank and Trust Company); (2) the federally chartered secondary market (the Student Loan Marketing Association); and (3) state-level agencies or institutions in California, Colorado, Indiana, Nebraska, Pennsylvania, and Virginia as well as the New England Education Loan Marketing Corporation which serves four states. The study found that annual after-tax rates of return varied considerably during fiscal year 1985-88 among and within the institutions. The Student Loan Marketing Association, the two commercial banks, and the Indiana agency were profitable during each of the 4 years. Profit variations were due primarily to differences in the lenders' financing, servicing, operating, and other costs. The 1986 subsidy reductions had little effect on lenders' revenues. Appendices describe the study methodology, display data supporting the report's figures, and present comments from the financial institutions examined. (JDD)