Written by Kristyn Pilgrim

Understanding Master Promissory Notes Before Taking a Federal Student Loan

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    Understanding Master Promissory Notes Before Taking a Federal Student Loan

    Written by Kristyn Pilgrim

    Receiving a college acceptance letter is one of the most exciting moments in a student’s career. The promise of a bright future is undeniable, but many students still need to determine how they’re going to pay for tuition and other expenses. 

    While some individuals decide to take on debt from a private lender, many students turn to federally financed student loans to help pay for college. However, getting student loans is often a challenging and complex process. One of the necessary steps to getting a federal loan is signing a Master Promissory Note (MPN). 

    A promissory note is a legal document where the borrower agrees to pay back the lender, along with some other terms that outline the rights and obligations of each party. You may find promissory notes in all kinds of situations involving debt, including mortgages, car financing, and personal loans. 

    An MPN for federal student loans outlines the terms of your loan, including the amount, interest rate, and how you can spend your loan money. MPNs may seem a bit confusing at first, but we have your back. Here, you’ll learn everything you need to know about Master Promissory Notes for federal student loans. 

    When Do Students Sign a Master Promissory Note?

    You need to sign your MPN before you receive your student loan money. However, for most schools, you only need to sign one MPN. Each MPN is valid for up to 10 years. So, if you take out additional loans within that 10-year period, your original MPN will govern the terms of those new loans. 

    However, if you take out a Direct PLUS loan – a type of student loan where parents serve as the guarantors – you may need to update your parents’ contact information annually. Also, if you take out a parent PLUS loan, your parents may need to sign their own MPN. 

    Types of Master Promissory Notes

    You’ll need to sign an MPN for two types of federally funded student loans. 

    You may need to fill out both MPNs if you take out Direct and PLUS Loans. If you have any questions about which form you need to complete, make sure to contact your loan servicer. 

    What’s in a Master Promissory Note? 

    An MPN is a legal document that outlines the terms and conditions of your loan agreement. You can expect to find the following provisions in your MPN: 

    • Borrower information: You’ll need to provide basic information like your name, birthday, contact information, and Social Security number. 
    • References: You need to list two references who you have known for at least three years. 
    • School information: You’ll need to list your school’s name and other identifying information. 
    • Borrower certifications: This section has provisions certifying that you have provided accurate information, agree to use the loan proceeds for educational expenses, and various other promises. 
    • Promise to pay: As you might imagine, this section includes a promise to pay the government back for the loan, including any related interest and charges.
    • MPN terms and conditions: This section has a variety of terms that outline interest payments, fees, loan cancellation, grace periods, and situations that might count as defaulting on your loan.  

    Make sure to read your MPN thoroughly before signing. Even after you receive your loan proceeds, you may want to check your MPN before spending your loan money. For example, according to Section 6 of the “Direct Subsidized Loan and Direct Unsubsidized Loan Borrower’s Rights and Responsibilities Statement,” you may only use loan proceeds to pay the following expenses: 

    • Tuition
    • Room
    • Board
    • Institutional fees
    • Books
    • Supplies
    • Equipment
    • Dependent care expenses
    • Transportation
    • Commuting expenses
    • Rental or purchase of a personal computer
    • Loan fees
    • Other documented authorized costs

    If you spend loan money on something else, like a spring break vacation, the government may consider you in breach of your MPN, resulting in the loss of your loan or other penalties. 

    How Do I Sign a Master Promissory Note? 

    You can fill out your MPN either on paper or online. Completing the entire document only takes about 30 minutes. 

    If you apply for federal student aid, you’ll need to complete the Free Application for Federal Student Aid (FAFSA) and create an account. After creating an account, getting an identification number, and determining which MPN form is right for you, you can fill out the MPN through the government website. If you need any assistance, visit the FAFSA help page or contact your loan provider. 

    Subsidized vs. Unsubsidized Loans

    Before you fill out an MPN and sign on the dotted line, you need to make sure you understand the terms of your loan. Fully grasping the difference between subsidized and unsubsidized loans is crucial to an accurate understanding of your obligations. 

    According to the Department of Education, subsidized loans offer slightly better terms than unsubsidized loans. Interest rates for subsidized loans are roughly 1.5 percentage points lower than those for unsubsidized loans. Plus, the federal government agrees not to charge interest on subsidized loans until six months after the borrower leaves school – this is called the “grace period.” Unfortunately, holders of unsubsidized loans don’t get a grace period. Interest for unsubsidized debt starts accruing the moment the borrower receives the loan proceeds. 

    Why would anyone choose unsubsidized loans? Well, students must demonstrate financial need to get access to subsidized loans. Plus, subsidized loans are only available to undergraduate students.

    Whether you have subsidized or unsubsidized loans, you’ll fill out the same Master Promissory Note. However, the exact terms of each loan will be slightly different. 

    What Happens After I Sign a Master Promissory Note? 

    After you sign your MPN, it becomes a legally binding contract that will apply to student loans you take out within a 10-year period. You’ll have to follow the terms of the agreement and pay back your loan amounts even if you leave school or are unhappy with your educational experience. You’ll have to pay back your loan no matter what, even if you file for bankruptcy. As a result, make sure to carefully consider the terms of your MPN before signing. 

    We recommend keeping a copy of your MPN available in case you have any questions regarding the terms of your loan. 

    Do Private Student Loans Have a Master Promissory Note? 

    If you get a private student loan – or if you refinance your government loans with a private lender – you’ll probably need to sign a promissory note outlining the terms and conditions of your debt. However, each lender has its own form that likely has many differences when compared to the MPNs required by the federal government. 

    If you’re considering taking out a private loan (or refinancing), you’ll want to carefully review the terms of the loan before signing a promissory note. When evaluating a loan, consider the following factors: 

    • What is the loan’s interest rate? 
    • What is the loan’s annual percentage rate (APR)?
    • How much is the monthly payment? 
    • What is the total cost of borrowing? 

    You may also want to think about what your plans are post-graduation. If you want to work for the government or a nonprofit organization, you may be able to take advantage of loan repayment programs like Public Service Loan Forgiveness or the Federal Student Loan Repayment Program. 

    However, these loan repayment programs only apply to federally issued student loans. So, if you think a career in nonprofit or the government is in your future, you may want to think twice before opting for a private student loan. 

    Get Help With Student Loans 

    If you or someone you know is in the college selection process, visit College Finance for in-depth resources helping students and parents pay for college. Whether you want to learn about financial aid, student loans, or other financing options, our experts at College Finance can help you plan for the future.

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