Congratulations, high school seniors – you made it to prom season. It's the time of year to worry over who to ask and what tuxedo to wear. But the Student Loan Ranger wants to let you know about a different type of prom that could cause you even more anxiety – your student loan's promissory notes.
Yes, student loans have their own "proms." A promissory note is your student loan contract and it outlines terms and conditions as well as any rights and responsibilities you have as a borrower. You have to sign a promissory note to receive a loan, and as with any legally binding document, you should read it closely before doing so. Otherwise, you could look even more foolish than if you wore a powder blue tuxedo to prom.
To help you do this, here are five things to be aware of before signing your notes.
1. Which type of loans are you borrowing? Student loans fall into two main buckets: federal loans, which are issued by the government; and private loans, which are issued by banks, schools and any other third-party lender. Be sure you know which you’re signing for.
The note itself will explicitly spell out all of these options. For instance, check out section 21 in this federal direct loan promissory note for all the times you can postpone your repayment with a deferment.
2. What options do you have? While federal student loans entitle you to specific repayment options, private student loans vary by lender. Look closely at the fine print of your agreement to see what a lender offers you.
Specifically, pay attention to any options that allow you to lower or pause your payments if you’re unemployed or facing another financial hardship – and what taking advantage of these options will cost you. Also, see what the note says about debt responsibility if the borrower dies or becomes permanently disabled.
And what if something happens to the co-signer? A recent report from the Consumer Financial Protection Bureau says that private lenders sometimes place student loans into default if the co-signer dies or files bankruptcy.
[Find out how to read your student loan report.]
3. Is it a master promissory note? You have to sign a promissory note for each loan you borrow. However, for federal loans, you can sign a single master promissory note, which authorizes the disbursal of multiple loans to you, provided you request the new loans and your school certifies your eligibility for them annually.
Schools are not required to use a multiyear master promissory note, so pay attention to what you’re signing to see if yours does. You don’t want to forget to refile your paperwork next year – and not get your loan funds – if they don’t.
4. Can you remove your co-signer? You may be required to have a co-signer with good credit, like your parent, in order to borrow a private student loan. That person agrees to pay the debt if you don’t or can’t, and he or she is equally responsible for the amount you borrow regardless of whether you tell them not to worry about it.
If you want to put your co-signer’s mind at ease, look at your note to see if there are conditions where you can release them from their obligation if you successfully make a certain number of on-time payments or meet some other criteria.
[Learn why you should pay attention during student loan exit interviews.]
5. What additional costs are you facing? Odds are your student loan will be expensive enough on its own. The last thing you’ll want is for it to cost you more due to extraneous fees.
Some private lenders may actually charge you for paying off your loan early, which sounds counterintuitive. Also, look to see whether your interest rate is fixed or variable, especially with a private student loan.
That great, introductory rate isn’t so hot when it doubles. You’ll want to be sure you know how much these items will cost you, so you take on the least amount of debt, right now and in the future.
If you have questions about your promissory note or loan’s terms, ask your lender. However, make sure whatever they say or promise you is in writing. If it’s not, then they don’t have to stick to their word and you’ll still be on the hook for the loan.
And if you don’t like what you read, remember that you can shop around to find the private loan with the best terms for you.
Corrected on June 2, 2014: A previous version of this post misidentified the Consumer Financial Protection Bureau.