A bill to amend the Higher Education Act of 1965 to reduce the default rates of direct and guaranteed student loans.

Amends title IV (Student Assistance) of the Higher Education Act of 1965 to require, when student loan defaults reach certain levels: (1) the suspension or reduction of Federal capital contributions for FY 1986 and 1987 to the student loan fund of an institution of higher education under the direct student loan program; and (2) the suspension of a lender's eligibility under the guaranteed student loan program.

Directs the Secretary of Education to report to the Congress, within one year after the enactment of this Act, on the effectiveness in reducing student loan defaults of such regulations requiring suspension (for a default rate above 25 percent) or reduction (for a default rate between ten and 25 percent) of Federal capital contributions to a school's student loan fund under the direct student loan program, including recommendations for further reduction of such defaults by extending such regulations beyond FY 1987 and/or other measures.

Requires each guaranty agency having an agreement with the Secretary to provide information necessary to carry out the requirement of suspension of the eligible lender status under the guaranteed student loan program of any lender whose default rate exceeds 25 percent. Grants the Secretary specified authority for investigations or hearings to carry out such requirement. Authorizes the Secretary to lift such a suspension of eligibility upon determination that the lender has corrected the practices which led to the suspension.