If you’re looking for a way to pay for college and don’t have the funds readily available, you can consider a student loan promissory note. This document is a legally binding IOU in which a loan borrower promises to pay back the lender within a certain period and according to specific terms.
The promissory note ensures loan repayment by making the terms clear to the student borrower and enforceable by law. Learn more about student loan promissory notes, how they work, and how they contribute to a student’s ability to afford higher education.
When Taking Out Student Loans, What Do You Call the Signed Agreement to Pay Them Back?
The signed agreement to pay back student loans is called a promissory note. It can be secured with collateral or unsecured.
What Is a Student Loan Promissory Note?
A student loan promissory note records a student-lender arrangement, allowing the student to borrow funds from the lender. Student borrowers can use the funds from a promissory note to cover some or all of their tuition and other costs they may incur during school. For example, they may use the funds to pay for textbooks, computer equipment, rent, and groceries.
This note includes the interest rate, repayment period, and other financial details. When you sign the note, you agree to follow all its terms. Before committing to this arrangement, please read the note carefully, ask for clarification, and fully understand its terms. Review a promissory note template before signing to learn more about the terminology and information it contains.
As a student, you can expect to begin paying your student loans after you earn your degree, drop out, or are no longer enrolled on a half-time basis. While the payment schedule may vary, you can expect to become responsible for making each monthly payment until you pay off the full amount plus interest.
What’s the Difference between a Student Loan Promissory Note and a Master Promissory Note (MPN)?
Scope and Eligibility:
- Master Promissory Note (MPN): Exclusively for federal student loans, including Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans.
- Student Loan Promissory Note: This can encompass loans from both federal and private sources.
Duration and Coverage:
- MPN: Enacted for several years, often up to 10, covering multiple loans.
- Student Loan Promissory Note: Typically covers one academic year and requires a new note for each private loan.
Multiplicity of Loans:
- MPN: Allows obtaining multiple loans under a single promissory note.
- Student Loan Promissory Note: Requires a separate note for each private loan the student takes outs.
Variations in Types:
- Unlike MPNs, student loan promissory notes can be of different types. They can be either secured or unsecured.
- Secured: Provides collateral in case of default.
- Unsecured: Does not involve collateral.
A student loan agreement differs from a promissory note regarding the parties’ responsibilities. A loan agreement involves both the lender and the borrower having ongoing responsibilities. Alternatively, only the borrower has ongoing responsibilities after the lender’s initial loan payment under a promissory note.
Key Elements of a Student Loan Promissory Note
Here are some terms to understand before you sign a student loan promissory note:
- Loan amount: The loan amount is the initial sum the lender agrees to give you to pay for your education and associated costs.
- Disbursement: Disbursement refers to smaller, divided amounts of the total loan amount the lender will pay out at certain times.
- Interest rate and calculation: The loan will include either a fixed interest rate, which will remain the same over the lifetime of the loan, or a variable interest rate, in which interest fluctuates at specified periods due to market benchmarks
- Repayment terms: Repayment terms refer to how much you will pay and when. These details may also include any borrower benefits available to you, such as loan forgiveness programs or the ability to pause or lower your payments during financial hardship.
- Borrower and lender information: This document will include identifying information like your name, address, Social Security number (SSN), birthdate, and contact details. It will also list your lender’s name, address, and contact information.
- Borrower’s obligations: This note will highlight your responsibilities as a borrower and what can happen if you don’t meet your payment duties.
Once you repay your student loans, the lender can issue a promissory note release form to formally end your arrangement.
How to Minimize Student Loan Debt
College can be quite costly, as the average cost for first-time, full-time undergraduate students at a four-year postsecondary institution is $36,463 per year [1] .
Explore some ways to minimize student loan debt so you can set yourself up for greater financial success after college:
Choose a Less Expensive College or University
When choosing the college you want to attend, prioritize cost considerations to minimize student debt in the long run. You could enroll at a community college or a less expensive college for a couple of years and then transfer. Or, you could attend a college with sufficient financial aid packages for students from low-income backgrounds.
Budget Wisely and Only Borrow What You Need
Ensure you have a clear view of expenses outside tuition, such as room and board, books, school supplies, and other costs. Account for these costs to create and adhere to a budget that allows you to pay for as much of your tuition as possible, reducing the amount you’ll need to borrow. You can also start a side hustle or get a part-time job to help pay for school with a smaller loan.
Explore Scholarships and Grants
Complete your free application for federal student aid, or FAFSA, to see if you qualify. Next, explore scholarships and grants in your community, at your current school, at the college itself, in its surrounding community, and nationally. You may find a good grouping of niche scholarships that fit your identity, interests, and financial needs.
Evaluate All Loan Options
Don’t sign the first student loan contract you receive without reviewing other options. Research every type of loan available to you and their terms to ensure you agree to the loan with the best terms for your situation. If you don’t know where to start, turn to your school’s financial aid office, educational advisors, family members, or other resources that can answer your financial aid questions.
What Happens If You Default on Student Loans?
If you don’t repay your student loans, you can incur penalties like:
- Loss of eligibility for federal loan benefits: You may lose access to repayment plans, deferment (a temporary pause on your payments, potentially without accruing interest), and forbearance (another form of temporary pause on loan payments, with interest still accruing during this period).
- Getting cut off from future aid: You may become ineligible for additional federal student aid, and it will be much harder to receive approval for any private student loans moving forward.
- Withholding or wage garnishment: The government can withhold your tax refund or take part of your paycheck to help repay your defaulted loan.
- A lawsuit: Your lender may decide to take you to court to collect the money owed.
- Bad credit score: Not paying back your student loans will negatively impact your credit score, which can reduce your ability to secure loans or access credit cards with favorable terms.
The Bottom Line
Understanding the intricacies of student loan promissory notes is essential for borrowers before entering any arrangement. With the proper knowledge, you can comprehend your obligations and prevent surprises during the repayment period.
Sign student loan promissory notes responsibly to empower yourself, manage your educational financing more effectively, and pave the way toward financial stability after you graduate.
Frequently Asked Questions
How Do I Get a Copy of the Promissory Note for My Student Loan?
If you have federal loans, you can find a copy of your MPN on the Federal Student Aid website. Otherwise, ask your lender or loan servicer to learn how to obtain a copy.
Do I Have to Pay My Student Loans if I Drop Out of College?
You must repay your loans regardless of whether you complete college. The promissory note you sign represents a contractual agreement stating your requirement to pay the money back no matter what.
Will a Student Loan Affect My Credit Score?
A student loan will affect your credit score. The amount you owe, payment history, and how long you’ve had the loan will show up in a credit report. Making on-time payments will positively affect your credit score, while late or missing payments will negatively affect it.
What Additional Fees Might I Pay When I Obtain a Student Loan?
You may have to pay an origination fee for the lender processing your loan application or an application fee just to apply for the loan initially. If you pay late at any point, you may incur late fees.
Do I Need a Cosigner for a Student Loan?
Federal student loan borrowers usually don’t need a cosigner for a federal loan because the loan is backed by the federal government. You will, however, need a cosigner for a private student loan if you lack a credit history.
You can release a cosigner from their obligation if you meet the criteria laid out in the promissory note. The criteria can include actions like making a specified number of on-time payments in full, which proves your reliability as the primary borrower.
