Understanding Your Student Loan Promissory Note

Generally speaking, promissory notes are legally binding contracts that state the terms of a loan, such as the amount to be repaid, the interest rate that will be charged, and any other important terms and conditions of that particular loan.

A student loan promissory note is no different; you’ll be required to sign one, accepting the terms of your student loan(s) before the lender disburses your money.

If a student loan promissory note sounds super important, that’s because it is. You can think of it as your student loan contract. Like any legal contract, it’s important to know the nuances of what you’re signing. Here’s what you should know about student loan promissory notes and master promissory notes.

What Is a Student Loan Promissory Note?

A promissory note is your student loan contract. It details the terms and conditions of that loan, as well as any rights and responsibilities you have as a borrower. Both federal student loans — loans backed by the U.S. government — and private student loans require that you sign a promissory note.

With private student loans, borrowers will generally be required to sign a promissory note for each student loan they borrow, because each loan’s terms and conditions may be different. Federal student loan borrowers may have the option to sign just one master promissory note.

What Is a Master Promissory Note?

Borrowers with federal student loans may be able to sign just one master promissory note. If eligible, a master promissory note covers all federal loans borrowed for a period of 10 years. There are versions of the master promissory note for both students borrowing Direct Subsidized or Unsubsidized Loans and a version for borrowers who are using Direct PLUS Loans.

Whether you’ll be able to sign a master promissory note is determined by the school you attend and the types of federal loans you have. Some schools do not offer the option to have students sign a master promissory note that covers borrowing over multiple years.

So be certain to understand what your school allows, and whether you need to sign multiple promissory notes or one master promissory note. The financial aid office at your college should be able to guide you through the process.

What Should I Look for on My Student Loan Promissory Note?

Understanding the terms and conditions of a student loan promissory note is akin to understanding the terms of student loans. Here are some important items to consider on your loan, and note:

Loan type: First, it is important to know what type of loan you have. Federal loans will have different terms than private loans, which are loans accessed through an independent bank, credit union, or other lender.

Repayment options: Federal loans come with some options to help you manage your debt post-graduation, such as student loan forgiveness and income-driven repayment. If you have federal loans and access to multiple repayment plans, take some time to understand the ins and outs of different plans.

Deferment options: Federal loans may also offer options for student loan deferment, which would allow you to suspend making payments during periods of economic hardship, immediately after you leave school, etc. Private loans may also offer some deferment options, but every lender is different, so you’ll need to check your note.

Interest rate: The interest rate is a percentage of the principal loan amount that the borrower is charged for borrowing money. Be certain to understand the interest rate on your student loans, and whether that rate is fixed or variable. Federal student loans have fixed interest rates.

Private student loans may offer variable rates. If the rate is variable, it is possible that it will increase in the future, which would also increase your monthly payments. Be especially wary of private loans that offer introductory rate offers that later expire — they could end up costing you quite a bit of money.

Additional costs: In addition to the loan’s interest rate, a student loan promissory note should include information on any additional costs, such as a loan fee (also known as an origination fee). Student loan fees will vary by lender, so be sure to check yours. Sometimes a loan fee is deducted directly from the amount that is disbursed.

Prepayment fees: Speaking of additional costs, one thing to check for is whether your student loan allows you to “pre-pay” loan payments. If you think there’s a chance you’ll want to pay your loan back faster than the stated terms, check to see whether prepayment is allowed, and if so, how additional payments are applied and whether there are any fees attached. Making prepayments on the principal value of the loan could help reduce the amount of money you owe in interest over the life of the loan.

Cosigner removal: With some loans, especially private loans, you may be required to have a cosigner. (That’s because private loans rely on your — or your cosigner’s — creditworthiness to determine the terms of your loan. Federal loans do not.) Upon graduation, some borrowers want to release their cosigner of the responsibility of having their name on the loan, so you may want to find out whether that’s a possibility.

Allocation of funds: Some loans may require that the money is spent only on designated expenses, such as books or tuition. If you’re looking to upgrade your apartment, you might not be allowed to do so using student loan funds. Make sure to check on any stipulations on how you can spend the money.

When Is the Promissory Note Signed?

In general, borrowers will need to sign the promissory note for their loans before receiving any funds. Students who are borrowing federal student loans are able to sign their master promissory note online by logging into their federal student loan account.

Private lenders may have their own policies for signing a promissory note, it’s helpful to check-in directly with the lender if you have any questions.

Understanding Your Options

If you haven’t picked up on it already, knowing how student loans work and understanding your student loan contract is the name of the game. Taking out a student loan can be a huge financial commitment and shouldn’t be done without careful consideration — which means knowing what’s on that promissory note.

Before going to sign your student loan promissory note, it’s also a good idea to spend some time thinking about your financial goals. A good place to start is by looking at how much you’ll take out in loans, total, and compare that to how much money you can expect to make after you graduate from school. Use a student loan calculator to get an idea of what your monthly payments could be given your total debt and the interest rate.

Rarely is it financially sound to take out more in loans than you absolutely need. It might seem like Monopoly money now, but this is all money that you’ll have to pay back, with interest. The repayment process can be painstaking, especially as a person early in their career or during a setback, like layoffs or a health issue. Taking out the bare minimum in student loans may mean working part-time in college, exploring more affordable college options, or continuing to apply for scholarships after you’re enrolled.

Once you’ve graduated, keep in mind that refinancing your student loans is a way for some graduates to lower the interest rates on their loans or lower their monthly payments. Refinancing is a process where your existing loans are consolidated and paid off with a new loan from a private lender.

Generally, the borrower has the option to keep the same repayment schedule or increase or decrease the amount of time left on their loan. (Increasing the duration of a loan may result in paying more interest over time, whereas decreasing the duration of a loan may result in higher monthly payments, but less interest paid overall.)

If you’re planning on using your federal loans’ flexible repayment plans or student loan forgiveness programs, refinancing with a private lender may not be the right choice for you as you will lose access to those federal benefits. However, some private lenders, like SoFi, offer protections to borrowers who lose their jobs or experience economic hardship. SoFi even provides career counseling to help their borrowers get back on track.

The Takeaway

A student loan promissory note is a contract between the borrower and the lender that details the loan’s terms and conditions and where the borrower promises to repay the loan. Federal student loan borrowers may be able to sign just one master promissory note, which will cover all federal loans for a period of up to 10 years. Private lenders generally require a promissory note for each individual loan.

Understanding the terms and conditions of your loan when signing of the promissory note can help you set your expectations for borrowing and ultimately repaying your student loans.

Whether you need help paying for school or help paying off the loans you already have, SoFi offers competitive interest rates and great member benefits as well.

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