What is a Master Promissory Note?
A Master Promissory Note (MPN) is a binding legal document between you and the lender wherein you agree to repay the money loaned to you along with any interest and fees associated with the loan.
Signing the MPN one time also enables you to receive multiple federal student loans for up to 10 academic years under the same program.
By signing the MPN, you are agreeing to all of the terms and conditions set forth by the lender, which are outlined in the Borrower’s Rights and Responsibilities Statement included on the MPN.
These terms and conditions include the interest rate as well as deferment and cancellation conditions.
What does deferment mean?
If a borrower returns to college, or is unemployed for an extended period of time, or is on active military duty, he or she may request that their loans be placed on deferment.
A lender does not have to grant deferment. But if the lender does grant a deferment, the borrower can temporarily postpone repaying a loan.
What does forbearance mean?
If a borrower is experiencing financial hardship due to reasons outside of his or her control (for example, illness or underemployed), he or she may request of their lender a temporary delay in paying back the loan.
If the lender approves the request, the borrower will be given temporary relief on the principal payments. This is known as forbearance.
However, interest charges will still be incurred and will be added to the total balance due.
What does it mean to consolidate a federal loan?
If you have multiple federal student loans, you may determine that you want to combine them into one loan.
This combined loan is called a consolidated loan.
If your federal loans are in a grace period or in repayment, you may be eligible to consolidate your student loans.
When you consolidate multiple loans into one loan, a few things will happen.
The new loan will have a fixed interest rate.
The new loan will enable you to make a single student loan payment each month (instead of the multiple payments you had been making).
Your monthly payment will be lower (however, you will pay more in total interest by doing this).
If you do combine more than one student loan, the amount you owe on each loan is added together and the interest rate is recalculated.
The new interest rate is equal to the weighted average of all the loans being consolidated.
This new interest rate will be fixed, meaning that the interest rate will never change again.
Before you consolidate your federal student loans, be sure to determine whether it makes sense to do so.
In some cases consolidation is a prudent course of action. In others, it is not.