Question of the Day: What Is A Student Loan Master Promissory Note?

Oct 14, 2014
Paying for College, Question of the Day, Financial Literacy, Student Loans

In looking for good video content to help students understand the master promissory note (talk about a challenging assignment to make this topic interesting!), I kept coming across videos with like “How To Complete A Master Promissory Note (MPN).” Given the importance of this MPN I thought “What an opportune time to teach students about what they are signing up for before they accept a student loan.”  This may be the first time they have a chance to interpret “the fine print.”  Instead, what I found was videos with screenshots navigating school websites or detailed explanations about the process to sign the MPN but little about the terms and conditions.  Yes, I know that entrance counseling for federal loans exists (which most believe is woefully inadequate with many students not even remembering it).  More should be done about explaining responsibilities and incorporating it into the MPN signing process would seem to be a good place to teach students.

So, what should students know about the MPN?  Rather than struggle with the 11 page MPN document I instead chose to analyze the 4 page (revised, now 6 pages!) Plain Language Disclosure.  You might ask the students to read the four page Plain Language Disclosure (link above) and list the 5-7 most important terms of the contract as they understand it.

Here would be my top items for students to understand in the MPN:

  • You are required to repay the loan:  “You must repay this loan, even if you are unhappy with your education, do not complete your program of study, or cannot find work in your area of
    study. Borrow only the amount you can afford to repay, even if you are eligible to borrow more.”
  • Describes the difference between Subsidized and Unsubsidized Loans:  “To receive a Direct Subsidized Loan, you must have financial need. Except as explained in Item 10 of this Disclosure, you are not required to pay the interest that accrues on Direct Subsidized Loans while you are in school, during the grace period, during deferment periods, and during certain
    periods of repayment under the Income-Based Repayment Plan and the Pay As You Earn Plan.
    Direct Unsubsidized Loans are not based on financial need. You must pay the interest that accrues on Direct Unsubsidized Loans during all periods.”
  • it is borrower’s responsibility to notify loan servicer of change of address (i.e. can’t use the excuse that you didn’t get the bill):  While you are still in school, you must notify your school if you (i) change your address or telephone number; (ii) change your name (for example, maiden name to married name); (iii) do not enroll at least half-time for the loan period certified by the school, or do not enroll at the school that certified your eligibility for the loan; (iv) stop attending
    school or drop below half-time enrollment; or (v) graduate or transfer to another school. You must also notify your servicer of any of the above changes at any time after you receive your loan…”
  • Can only use the loan to pay for educational expenses:  ” You may use your loan money only to pay for educational expenses (for example, tuition, room, board, books) at the school that determined you were eligible to receive the loan. If you accept this loan, your eligibility for other student assistance may be affected.”
  • Limits on what you can borrow:  “There are limits on the amount you may borrow each academic year (annual loan limits) and the amount you may borrow in total for undergraduate and graduate study (aggregate loan limits)…”
  • Interest rate for the loan described in the MPN but disclosed in disclosure statement received later:  “Loans first disbursed on or after July 1, 2013 have a fixed rate that is calculated in accordance with a formula specified in the Act. The interest rate is calculated each year.”
    • Ask students to find interest rate on loans for 2014-15:  4.66% for Direct Sub. and Direct Unsub. loans.  (Federal Student aid site)
  • There is a loan fee but we will tell you about it later:  “For each Direct Subsidized Loan or Direct Unsubsidized Loan you receive, we charge a loan fee that is a percentage of the principal
    amount of the loan. This fee will be subtracted proportionately from each disbursement of your loan and will be shown on a disclosure statement that we send to you.”

    • Ask students to find out what the fee for Direct Sub. and Direct Unsub. loans:  1.073% (from Federal Student Aid site)
  • You have a grace period before you have to repay the loan:  “You will receive a 6-month grace period on repayment that starts the day after you stop attending school or drop below half-time enrollment. You do not have to begin making payments on your loan until after your grace period ends.”
  • There are multiple repayment options which you will decide upon as you get closer to having to repay the loan.
  • Oh, and if you don’t pay your loan back, the hammer will come down:  “You are in default on your loan if you (i) do not repay the entire unpaid amount of your loan if we require you to do so; (ii) have not made a payment on your loan for at least 270 days; or (iii) do not comply with other
    terms and conditions of your loan, and we conclude that you no longer intend to honor your obligation to repay your loan. If you default on your loan, we will report your default to nationwide
    consumer reporting agencies (see Item 21). We may sue you, take all or part of your federal tax refund, and/or garnish your wages so that your employer is required to send us part of your salary to pay off your loan. We will require you to pay reasonable collection fees and costs, plus court costs and attorney fees. You will lose eligibility for other federal student aid and assistance
    under most federal benefit programs. You will lose eligibility for loan deferments.
  • If you are struggling and can’t make your payments, deferments and forbearances are available which allow you to delay making payments.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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