Not all Kindle books are eligible for lending. Books that are eligible for lending are marked as such. When you lend a title you cannot read it until it is returned to you. While that is an inconvenience, it isn't any different than what happens when you lend a physical book. Click here for directions on how to lend Kindle Books.
Applications for Education
Lending Kindle books could add a new dimension to school library programs. I didn't see anything in Amazon's documentation that would prevent school libraries from lending titles to students to use on their personal Kindle devices. The automatic expiration of borrowing after 14 days should mean that school libraries won't have to go chasing down "late returns."