To Do: Stafford Loan Promissory Note
The Health Care and Education Reconciliation Act of 2010 revamped the federal student loan program. Prior to 2010, federal student loan lending occurred on two tracks: the Federal Family Education Loan Program (FFEL or FFELP) and the Federal Direct Loan Program. However, the 2010 Act eliminated FFELP, which sponsored Stafford Loans. Subsequently, the Federal Direct Loan Program became the main student loan lending program and includes the following loans:
- Direct Subsidized Loan
- Direct Unsubsidized Loan
- Direct PLUS Loan
- Direct Consolidation Loan
The end of the FFELP program does not pose a problem for student loan borrowers. The Direct Loan Program alone provides adequate lending. Further, as President Obama discussed, the termination of FFELP lending (as of July 1, 2010) was not a sign of any hard times. Rather, it was a move to make lending more cost-efficient overall.
Both undergraduate and graduate students will need to complete the Free Application for Federal Student Aid (FAFSA) to be considered for a Federal Direct Subsidized or Unsubsidized Loan. Based on the FAFSA, the school will determine which federal loans to offer students (including Direct Loans and in cases of exceptional need, a Federal Perkins Loan) and how much the student may borrow. In other words, it is important for students to note that they do not actually apply for Federal Direct Loans, but rather, upon completion of the FAFSA, they will be considered, on a case-by-case basis, for these loans.
As Federal Student Aid explains, a school’s financial aid office will help those students who receive a Direct Loan (or loans) offer. Most often, schools refer students to the online system for completing the Master Promissory Note (MPN). The note is a legal contract between the student loan lender and the student loan borrower that sets forth all of the governing terms of the loan, including:
- The interest rate
- The repayment term
- Any additional fees
- Provisions for deferment or cancellation
The terms of the MPN are set in stone, though in general, it is the lender, not the student borrower, who has the right to change terms. But a modification of terms can be a benefit to borrowers down the road. For instance, although the MPN may state that there is a specific repayment period, a borrower may have the option to lengthen the repayment period (to lower the monthly amount due, though the borrower may end up paying more over the life of the loan).
After reading and reviewing the MPN, a student borrower must sign this document. In order to do so online, the student borrower must have a FSA ID. To provide additional assistance to borrowers, the U.S. Department of Education has created a useful MPN Frequently Asked Questions.
At the undergraduate level, Federal Direct PLUS Loans are only available to parent borrowers. Parents who borrow a Direct PLUS Loan for more than one dependent child in college will need to sign a separate MPN for each child.
The entire online MPN process takes approximately 30 minutes. Both student and parent borrowers should note that the MPN must be completed within a single session, so definitely set aside enough time before commencing the application.