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Using agency theory, this paper analyzes schools, particularly career schools, in the Stafford Loan Program for student incentive to graduate and pay off their loans. Agency theory focuses on the roles of information and incentives when a principal and an agent cooperate with respect to the utilization of resources. The analysis examines the incentives provided by the principal, the Federal Government, for its agent, the career school. The finencial structure of a school and the current financial aid program are modeled and show that the student loam programs can cost approximately $120,000 per 100-student school annually. This analysis also shows that the current system encourages szhools not to be selective, not to exert any special recruitment effort, and to increase their capacity to enroll large numbers of students they believe are unqualified. An alternative structure is shown using agency theory and introducing parameter values that maximize both the agent's and principal's interests. This system would reward schools for selection effort and minimize costs to the government. A numerical exauple of the alternative structure applied to a hypothetical school is included. Also included are 13 references and 1 table. (JB) Reproductions supplied by EDRS are the best that can be made from the original document. **** * Itilt**************************************************************