When you're applying for a private student loan, you'll be asked to sign a promissory note (prom note)—a fancy name for a loan contract. Typically, you'll need to sign a separate prom note for every private student loan you take out.
When you need to borrow money for college, it's tempting to just sign without thoroughly reading it. But it's a legal document, so you need to understand all the information in the contract before you sign it.
You promise to repay the loan
A prom note is a legally binding IOU. In exchange for the lender giving you funds for school, it's your (and your cosigner's) promise to repay your private student loan under the specific terms written in the prom note. A private student loan promissory note is a contract between:
- You, the borrower, and
- Your cosigner (if you have one), and
- Your lender (the bank or credit union that is lending you money)
What's in a prom note?
The prom note, which is a legally binding document, spells out:
Terms and conditions:
How interest is charged and payments are applied, what interest capitalization means and when it could happen, where the funds are sent (to your school) and the fact that the loan must be used for educational use. It also spells out what happens if you miss one or more payments.
Rights and responsibilities:
You have the right to:
- Cancel the loan before you get the funds
- Get a payment schedule before you begin to repay
- Repay the loan early (with or without penalty — depending upon your specific loan provider)
You are responsible for:
- Repaying your loan plus applicable interest in full (even if you don't graduate or get a job)
- Letting your loan servicer know if your address or phone number changes
- Making your payments on time even if you don't receive a bill
After your loan application has been approved
Next, along with your approval for your loan, you will receive a “loan approval disclosure.” This disclosure identifies the interest rate you are being offered, how many months you'll have to repay the loan, your estimated monthly payments, and the estimated total cost of the loan.
The rate that's listed in the loan approval disclosure is guaranteed for 30 days. That gives you time to make sure you understand the loan and feel comfortable with its terms, or to look for another loan. Once you accept the loan, your lender will send you a Final Disclosure that provides you with an automatic and non-waivable three-day right-to-cancel period. Your loan funds will not be provided to your school until that three-day period is over.
If you don't understand, ASK!
Lenders want you to fully understand what you’re signing. Don’t hesitate to reach out if you have questions.
Signing a prom note — a legal contract for a private student loan — is a serious commitment. That's why it's so important to read and understand all the details in it. When you and your cosigner sign a prom note, you have jointly promised to pay back the loan at a specified rate and over a specified period of time.
Remember, if you have any questions about any of the terms or conditions in the prom note or in your loan approval disclosure, be sure to ask your lender and get advice from the school's financial aid officer and your cosigner.
It's your loan, so make sure you understand everything that you're signing.