Dear Debt Adviser,
I am an American student at a university in London. My only funding options are entirely through the United States (federal loans, the Bank of Mom and Dad, etc.). Recently all my funding options dried up except for one, a Sallie Mae Smart Option Student Loan that I can take out myself with no co-signer at 14 percent interest or with a co-signer at a much lower interest rate, depending on the person’s credit. I have two questions:

  1. Does it make sense to take out $40,000 at 14 percent, assuming I can expect no financial help from my parents when I graduate?
  2. What kind of responsibility is a co-signer taking on, and what are some of the facts on co-signing for a student?

— Olivia

Dear Olivia,
First, I want to remind you that your funding options have not dried up, and you do have alternatives other than a high-interest student loan or a co-signed student loan with a lower interest rate. The alternatives may not be what you had planned or would wish for, but often life is like that.

You could postpone finishing school and get a job to save the money for the semesters you need to fund. You could move back to the states and take some classes here at a less expensive university and then perhaps go back to London to finish school.

My worry for you — and for many currently attending colleges — is that you are taking on tremendous amounts of debt and may or may not be able to secure jobs to service those loans when you graduate. To make matters worse, the loans must be repaid under most conditions, regardless of the person’s circumstances.

That will remain the case until or unless the laws are changed to get some relief from student loans through bankruptcy. For this and many other reasons, I do not recommend anyone co-sign any type of loan for anyone. The risks are just too great, and the period of jeopardy is basically forever. I don’t even recommend parents co-signing for their children unless the parents are fully prepared and able to make all the payments.

Should you decide that you want to go ahead and finance the rest of your college with a $40,000 student loan at 14 percent interest, I strongly encourage you do the math. Fourteen percent in today’s interest rate environment is huge, and doing the math should give you some idea of how risky the repayment of your loan is.

What type of job do you anticipate you will have once you graduate, and will the salary from that job allow you to pay off your loan and still clear basic living expenses? Keep in mind that while you may qualify for a job that will pay enough to service the loan, it doesn’t mean you’ll get it. So the last thing I want you to consider is how you’ll make the payments and support yourself if you don’t get the job you want in your chosen field. In other words, what’s your plan B?

If your parents or anyone else decide to ignore my advice and co-sign a loan for you, all of you need to keep in mind that the co-signer needs to be able to afford to pay the loan without damaging his or her finances should you be unable to pay back the money.

Then, if the answer is yes, consider taking out some low-cost life insurance. If you die before you’re able to pay back the loan, your co-signer is still on the hook for the money.

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