By signing a promissory note, you are acknowledging that you understand the terms of the loan you are about to receive, including the balance of the loan, the interest rate and the rules governing repayment. Lenders will typically answer any questions you have about any feature of the loan, so you should take advantage of their ability to ask questions before committing yourself to terms that confuse you. Ignorance is never an excuse, and when you sign a promissory note, you are committing yourself in a legal contract to abide by the terms of the loan.
If you apply for your loans through the Federal Direct Loan Program, you will sign a Master Promissory Note for the Department of Education which covers any Stafford of PLUS loans you receive. These notes are valid for 10 years and will automatically apply to any new Stafford or PLUS loan applied for in future semesters. Parents who elect to borrow from the Parent PLUS program are required to sign a separate master promissory note that will also be valid for 10 years.
Loans through a private lender, often a bank, typically require their own promissory note separate from the Master Promissory Note above. While they are often very similar in appearance, you should not rely on this similarity alone. The new note legally obligates you to the terms of the private loan, which are often different from the terms of Stafford or PLUS loans. You may be agreeing to a much higher interest rate or to a different repayment schedule without realizing it.
Perkins loans, despite also being a federally subsidized loan, have a separate promissory note that must be signed. These notes, signed through Educational Computer Systems, obligate you to repay the loan as soon as you graduate or fall below at least half-time enrollment. As students who take out Perkins loans are typically required to borrow from a different lender than the one used for Stafford, PLUS or private loans, a separate promissory note is usually necessary.
The penalties for failing to meet your obligations under a promissory note are usually defined in the note itself. They may include a higher interest rate, a more stringent repayment schedule, loss of benefits such as the ability to defer payment, and inability to receive additional loans in the future. Several federal repayment assistance options are only available to you if you satisfactorily meet the obligations of your promissory note, so understanding your legal obligations under each is vital to a smooth repayment.