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Many students need to take out federal student loans to afford college, and in doing so will have to sign a binding legal agreement called a Master Promissory Note. But don't sign it without thoroughly understanding what you're agreeing to.
A Master Promissory Note, or MPN, is a legal document that outlines the terms and conditions of your federal student loans. Promissory notes are used for all types of loans, like auto loans, mortgages, and personal loans, though an MPN is a special type of promissory note used exclusively for federal student loans.
"A Master Promissory Note covers one or more years of borrowing to pay for college, for up to 10 years of continuous enrollment at a specific college or university," says Mark Kantrowitz, president of PrivateStudentLoans.guru, a free website about borrowing for college.
"Thus, instead of signing a new MPN each year, you sign a single MPN at the start of your education and accept the amount of each year's new loans under the terms of the existing MPN."
There are three types of MPNs: one for undergraduate students, one for graduate students, and one for Parent PLUS loans. There aren't major differences between the three other than you'll have to fill out different forms, and active confirmation each year is required for Parent PLUS loans.
Note: You'll only have to fill out one Master Promissory Note for all the federal student loans you take out while you're in school, provided your enrollment is continuous.
The most common place to complete your MPN is on a federal online portal.
You'll need to provide contact information and two references when you fill out your MPN. You'll also select the schools to which you want to send the MPN. The references aren't cosigners on the loan, but are used to locate you if you move without updating your address with the Department of Education.
Your school will probably require some type of entrance counseling after you sign your MPN.
"It's a unique way to borrow," says Stacey MacPhetres, senior director of college finance at workforce education program provider Bright Horizons. "You don't close on a mortgage and sign all the paperwork before you know what your terms are. That's in essence what you're doing with the Master Promissory Note."
The MPN lists a lot of the details of your loans, including:
"The MPN will list a wide variety of details, everything from how your loan's interest will accrue and capitalize to what the loan proceeds can be used to pay for," says Andrew Pentis, formerly a certified student loan counselor at Student Loan Hero. "It's wise for borrowers to comb through the MPN to ensure they understand the details of their loan."
You won't receive your loan amounts through the MPN. Those will be offered to you by your school in your financial aid package. The interest rates on your loans also won't appear in your MPN, as rates change annually. Each federal loan has a fixed rate, meaning your rate will be locked in over the life of your loan.
It's important for student loan borrowers to sign and understand an MPN for the following reasons:
If you don't abide by the terms you agreed to when you signed your MPN, you're likely to face serious financial ramifications.
Defaulting on your loans essentially means you're not meeting your obligation to repay the loans you've borrowed. In general, you'll default on most federal student loans if you have not made a payment in more than 270 days. Defaulting on a federal loan will cause you to lose eligibility to receive federal student aid.
If you default and don't make alternative arrangements to repay your debt with your lender, the federal government has the right to get the money through other means. This might include garnishing your wages or taking tax refunds.
You'll take a significant hit to your credit score if you default on your student loans, and it will leave a mark on your credit report. Student loan debt is rarely dischargeable during bankruptcy.
Make sure you understand the terms of your MPN before moving forward with the loan process.
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Do I sign a new MPN for each school year? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You don't usually need to sign a new MPN for each school year. The MPN can be valid for up to 10 years at your school.
Where do I complete the MPN? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You can complete the MPN on the Federal Student Aid website.
Can I make changes to the MPN? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
No, you cannot make changes to the MPN, but you can contact your loan servicer if your situation changes after signing.
What if I violate the terms of the MPN? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
If you violate the terms of the MPN, you could default on your loans, leading to wage garnishment, damaged credit, and loss of eligibility for future aid.
Ryan Wangman was a reporter at Personal Finance Insider reporting on personal loans, student loans, student loan refinancing, debt consolidation, auto loans, RV loans, and boat loans. He is also a Certified Educator in Personal Finance (CEPF). In his past experience writing about personal finance, he has written about credit scores, financial literacy, and homeownership. He graduated from Northwestern University and has previously written for The Boston Globe.
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