“Do not let any needy student drop off school” is the goal of Government- Subsidized Student Loans (GSSLs) program in China. However, high default rate results in banks` not willing to release loans or even stop GSSLs business. Moreover, the ratio of students from low income families to the total enrolled in national key universities has been decreasing during last decade. With the game model of releasing banks and loan-received students, this paper firstly analyzes the prison dilemma of GSSLs program in China: banks` not willing to release and students` not repay, and then investigates the problems of government functions, adverse selection and moral hazard, the big gap between supply and demand of GSSLs, and high default rate. Finally, this paper concludes with policy options, in terms of introducing parents and government guarantee into GSSLs program, speeding up the construction of national individual credit check system, and experimenting hybrid fixed schedule-income contingent repayment loans.