Here's what to know about the Master Promissory Note before signing off on your federal student loans

A Master Promissory Note (MPN) outlines your federal student loan terms and conditions. Don't sign without fully understanding what's it entails.

• A Master Promissory Note (MPN) is an agreement between you and the government to repay your debt.
• You agree to only use loan funds for authorized academic expenses when you sign an MPN.
• If you fail to meet the conditions of your MPN, you could end up defaulting on your loan. 
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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. 

What is a master promissory note?

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.

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 education finance at tuition-management services provider EdAssist Solutions. "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."

What information is included in an MPN?

The MPN lists a lot of the details of your loans, including your loan repayment term length, available repayment plans, and how interest on your loan works.

"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, 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.

What am I agreeing to by signing an MPN?

The MPN is a long document. Here's a list of some of the most important things you're agreeing to when you submit it:

• To make arrangements with your lender to repay federal loans you've defaulted on
• To release loan information to your references and immediate family members
• To be contacted by phone by your school or ED about your loan repayment
• To only use loan funds to pay for authorized educational expenses
• To repay the full balance of your loan, plus interest and other charges and fees
• To pay collection costs, including but not limited to attorney fees, court costs, and other fees if you don't pay your loans when they are due

"One thing I would say to students of any age is make sure you're reading everything that you're taking on," MacPhetres says. "The peril of the Master Promissory Note is not having to look at it every single year and say to yourself, 'OK, am I prepared to sign for this amount every year?' You signed it once and then the school is just obligated to transfer the record over."

What happens if you don't repay your loan?

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 (not counting the current COVID-19 forbearance period, which lasts through May 1). 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. As a result of COVID-19 student loan relief, the government has temporarily stopped collections on defaulted loans. 

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.