When you take out a loan, you need to sign a promissory note that includes your promise to pay and the terms both parties must fulfill. A promissory note is your loan agreement, and it is legally enforceable. You will need to sign a promissory note when you borrow for a mortgage, business loan, personal loan, car loan – and a student loan. It sets out the identity of the parties, the amount borrowed, when payments will be made and in what amount, and all the other terms of the agreement.
Federal and Private Student Loan Promissory Notes
When you sign a promissory note for your student loan, you are signing your student loan contract. You will need to sign one whether you take out a federal or a private student loan. However, the terms of a federal loan are consistent and contain consistent protections such as circumstances under which you can defer payment. Personal loans vary according to the lender and the individual loan.
Federal Student Loan Promissory Note
- Master Promissory Note – If you are taking out federal student loans, you may be able to sign a master promissory note that will cover multiple student loans from year to year. This saves you from having to complete multiple promissory notes. However, you must request the new loans and have your school certify your eligibility each year. Schools are not required to use master promissory notes, however, so be sure you understand what you are signing. You can complete a master promissory student loan on the Department of Education’s Federal Student Aid website, where you can also download a pdf version of the master promissory note.
- Interest Rates – Unlike private loans, federal loan rates are set by Congress and are not dependent on your credit score. They are fixed rate loans. Even if you can get lower private loan interest rates, you may still want to get federal loans because of their other benefits.
- Repayment plans – A number of repayment plans are available for you to choose.
- Extra costs – Federal loans have a loan fee that is a percentage of the loan amount.
- Payment flexibility– Federal student loans guarantee specific payment deferment or forbearance where you can temporarily stop paying on your loans under certain circumstances. If your payments are deferred, you need not pay interest during the period. For example, if you are on active military duty, your payments could be deferred. But there are additional scenarios. Financial difficulties, medical expenses, changes in employment and other reasons acceptable to your loan servicer may make you eligible for forbearance, but interest will not stop accruing. Some private lenders also offer repayment protections, but it they are usually fewer and more uncertain.
- Grace period – Federal loans offer a six-month grace period after you are no longer attending an eligible school at least half-time before you must start to repay the loan.
- Death, disability and bankruptcy – Federal loans are discharged if you die, you are totally and permanently disabled or if your loan is discharged in bankruptcy after you have proven to the bankruptcy court that repaying the loan would cause undue hardship. Direct Loans are not automatically discharged if you file for bankruptcy.
- References – When you apply for a master promissory note, you will need to provide two credible references who you have known for at least three years. The first must be a parent or guardian. Your references will need to vouch for your character.
Private Student Loan Promissory Note
Private student loans vary according to the lender, and they are unlikely to offer you as much flexibility when it comes to repayment as federal student loans. For an example of a private student loan promissory note, see this one from Chase. Before you sign a private student loan promissory note, be sure to read it carefully and check for these issues.
- Fixed or Variable Rates – This seems like something that should be obvious, but be clear whether your rate is fixed or variable. Variable rates start lower but can fluctuate monthly according to the market. It’s possible your variable rate could spike substantially, though the lender may have imposed a ceiling. A fixed rate is typically higher, but it remains the same and will cause no nasty surprises. With private lenders, your rate will depend not just on the interest rates they offer, but also your and your cosigner’s credit history. Whether you choose a fixed or variable will probably depend on many factors including the rates you are offered and how quickly you intend to pay off the loan. If the loan term is a long one, a fixed rate may offer more peace of mind.
- Repayment plans – Your lender will likely offer a variety of time periods from which to choose for your loan repayment.
- Extra costs – Some lenders charge extra fees, and they may even charge you if you pay off your loan early. Be sure to study the terms of your promissory note carefully for additional fees hidden in the fine print.
- Payment flexibility – Review the promissory note for terms that allow you to defer or lower your payments should you face some hardship. Check to see what qualifies such as loss of a job, health problems or the like. Typically, the lender has the final word on whether they approve payment deferment, so be sure you understand their approval criteria.
- Grace period – Many lenders offer a grace period after you are not a full or half-time student to start repaying your loans. Check for the exact criteria and compare them to federal loans which offer a six-month grace period after you are no longer attending school at least half-time.
- Death and disability – Check what happens to your student loan debt if you become disabled or die. Some lenders will waive the debt should that happen. Others won’t.
- Cosigner problems – Most student loans have a cosigner. But should your cosigner die or file bankruptcy, some private lenders will put your loan into default even though your payments are up to date according to the Consumer Financial Protection Bureau.
- Cosigner release possibility – Once you are making your own money, you may want to release your cosigner. Some lenders will allow this if your credit measures up, and some will not. Check the lender’s promissory note for this. It may be easier to get a cosigner if they know they may be let off the hook legally at some point before the entire loan is paid.
Before meeting with lenders or filling out loan applications, research student loans online. Also, take a good look at your own situation and communicate with your school, so you can determine how much you will need to borrow. It may be tempting to borrow more than you actually need, but remember, you must pay back that money with interest. Take the time you need, and don’t let any lender pressure you in any way. This is the beginning of a new phase in your life, and it will pay to educate yourself and plan carefully.