5/16 FA 8.1

Instructions

OBJECTIVES & STANDARDS
Math Objectives
Calculate the interest accrued with different debt payoff methods
Common Core Math Standards
Link to all CCSS Math
CCSS.HSS.IC.A.1
CCSS.HSS.IC.B.6
Personal Finance Objectives
Identify dangers of compounding debt
Compare different debt repayment options available to debtors
Learn about different types of predatory lending and how to avoid it
Examine statistics on the prevalence and rates of debt in the U.S.
National Standards for Personal Financial Education
Managing Credit
8b: Explain how a borrower’s credit score can impact their cost of credit and their ability to get credit
10a: Describe how failing to repay a loan can negatively impact a person’s finances and life
10b: Identify sources of assistance with debt management
10c: Create a plan for a person who is having difficulty repaying debt

QUESTION OF THE DAY: What percent of Americans who have credit card debt won't be able to pay it off within a year?
Debt is not a common subject of conversation, so it can easily feel overwhelming. It can be helpful to know how common debt problems are when faced with debt to know you are not alone.  Answer the question on the first slide in the box. Then, compare your answer to the answer on the second slide. Finally, follow your teacher’s directions on how to answer the follow-up questions on the last slide.

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What percent of Americans who have credit card debt won't be able to pay it off within a year?_______ 

INFOGRAPHIC: Experian 2021 Consumer Credit Review
GRAPH: Charting 17 Years of American Household Debt
The “normal” amount of debt for an average person can be a tough question to answer, but can be a useful benchmark when considering your own decisions around loans. Take a look at this infographic and this graph depicting different aspects of debt in the U.S. Then, answer the questions.

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INFOGRAPHIC: The Consequences of Unpaid Debt
Just as you saw in the game, unpaid debt has consequences in real life too, often serious ones. NerdWallet has compiled this list of potential consequences of missing payments.. Use the chart to answer:

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Foreclosure and repossession are when you lose the rights of your property and the lender takes ownership of it. What types of loans could result in the seizure of your property?

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Wage garnishment is when payments are deducted from your wages before you are paid. In general, which type of loans can lead to wage garnishment if not paid on time?

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VIDEO: Debt Snowball vs Avalanche Method: Best Way to Pay Off Debt?
Let’s say you’re ready to start paying off your debt, but you aren’t sure how to allocate your funds, and there are a variety of ways you can approach it. Watch the video to learn about two of the most popular payoff structures, and then answer the questions.

Briefly describe the two methods in your own words.

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Let’s assume you’re the “average American” holding debt. What’s the best method to repay your loans - the Debt Avalanche Method or the Debt Snowball Method?
According to Debt Avalanche vs. Debt Snowball: What's the Difference?
Debt Avalanche: make minimum payments on all debt accounts. Contribute any additional money towards the highest interest rate debt.
Debt Snowball: make minimum payments on all debt accounts. Contribute any additional money towards the lowest balance account.
Assume you’ve got $1400 each month to contribute toward your debts. Assume you’re living a cash lifestyle from now on and not adding to any of these balances.
Here’s a snapshot of your monthly debt obligations:

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For each method, predict the order that the debts will be paid off.

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Make a copy of Vertex42.com’s Debt Reduction Calculator. Enter your 5 debts (Note: To enter 3% of balance, type =.03*The location of your balance.  Example  =.03*C8), set your Monthly Payment to $1400 and set the Strategy dropdown menu to Avalanche (Highest Interest First).  Use the results to answer the following questions:

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As a class Complete the following Chart and Answer the Questions independently: 

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What is an advantage to using the Debt Avalanche method?

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What is an advantage to using the Debt Snowball method?

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A friend says, “The most important thing you can do, to minimize your debt quickly, is to use the Debt Avalanche Method.” Do you agree or disagree? Explain your answer.

VIDEO: Payday Loans Explained
VIDEO: Payday Loans Can Trap Consumers With Interest Rates, Hidden Fees
Watch these videos to get a better understanding of what payday loans actually are, who uses them, and how they can lead to a cycle of debt! Then, answer the questions.

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How are payday loans different from other loan types you’ve learned about?

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Let's consider the example in the video. Sally takes out a $375 loan and can't afford to repay it after two weeks. She pays a $55 renewal fee every two weeks. Assuming she has to renew that loan as stated in the video:
a.  After 6 months (26 weeks), how much would she have paid in fees?_______ 
b.  How much would she pay in fees over 1 year of renewing the loan?_______ 
c.  To compare the cost of loans, we can calculate the APR, which is the total cost of the loan, including fees and interest, divided by the principal. Since this type of loan just has fees, use the formula APR = fees/principal *100 to calculate the APR for this loan after one year expressed as a percentage._______ 

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ARTICLE: Predatory Lending
Debt can sometimes stack up due to our own choices, but other times we are taken advantage of by unfair lenders. Payday loans are just one practice that can trap borrowers into a cycle of debt. Skim the section titled “Predatory Lending Tactics to Watch Out For” to learn about other predatory practices, and then answer the questions.

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Choose ONE of these practices that you think poses a significant risk to borrowers. Give a brief definition of that tactic in your own words.

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Why did this tactic stand out to you?

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Explain how this tactic could contribute to a cycle of debt.

ARTICLE: How to Manage Debt of Any Size
If you are unable to manage a program on your own or extenuating circumstances apply, there are organizations explicitly to help you get back on track. These debt relief services are often free or low-cost and the biggest barrier to obtaining them is knowing they’re there in the first place.

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What is always the first step in beginning to tackle your debt? Why do you think this step is important?

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The article recommends making at least the minimum payments and always paying on time. What can you avoid by following these two rules?

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VIDEO: 4 Ways to Deal with Debt Shame
Debt can be a stressful thing, but there are some steps you can take if you find yourself in debt to help you work your way out. Watch this video on understanding debt shame and some keys to working through it, and then answer the questions.

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What are some potential non-financial costs to living with debt?

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How might the emotional impacts described make it more difficult to manage your debt?

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Why do you think it is common for people to feel shame about being in debt?

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Which accurately compares the interest and payback term of the debt avalanche vs. snowball?
The avalanche pays more interest and has a longer term than the snowball
The avalanche pays more interest and has a shorter term than the snowball
The avalanche pays less interest and has a longer term than the snowball
The avalanche pays less interest and has a shorter term than the snowball

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Which of these is a common predatory lending tactic to watch out for?
Balloon payments
Subscription services
Origination fees
Loan skimming

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Which of these students has an accurate statement on debt in America?
Gerardo: “There is no excuse for anyone to have debt. If you work hard enough, you should always be able to avoid debt.”
José: “High debt balances are relatively uncommon in America and usually only the result of an emergency or surprise expense.”
Manu: “Many people have many different types of debt, and it is relatively common for Americans to carry some debt.”
Blaise: “Credit card debt makes up the largest portion of household debt for most Americans today.”

OBJECTIVES & STANDARDS

OBJECTIVES & STANDARDS

5/16 FA 8.1

OBJECTIVES & STANDARDS

OBJECTIVES & STANDARDS

QUESTION OF THE DAY: What percent of Americans who have credit card debt won't be able to pay it off within a year?

INFOGRAPHIC: Experian 2021 Consumer Credit Review

GRAPH: Charting 17 Years of American Household Debt

INFOGRAPHIC: The Consequences of Unpaid Debt

Foreclosure and repossession are when you lose the rights of your property and the lender takes ownership of it. What types of loans could result in the seizure of your property?

Wage garnishment is when payments are deducted from your wages before you are paid. In general, which type of loans can lead to wage garnishment if not paid on time?

VIDEO: Debt Snowball vs Avalanche Method: Best Way to Pay Off Debt?

For each method, predict the order that the debts will be paid off.

What is an advantage to using the Debt Avalanche method?

What is an advantage to using the Debt Snowball method?

A friend says, “The most important thing you can do, to minimize your debt quickly, is to use the Debt Avalanche Method.” Do you agree or disagree? Explain your answer.

VIDEO: Payday Loans Explained

VIDEO: Payday Loans Can Trap Consumers With Interest Rates, Hidden Fees

How are payday loans different from other loan types you’ve learned about?

ARTICLE: Predatory Lending

Choose ONE of these practices that you think poses a significant risk to borrowers. Give a brief definition of that tactic in your own words.

Why did this tactic stand out to you?

Explain how this tactic could contribute to a cycle of debt.

ARTICLE: How to Manage Debt of Any Size

What is always the first step in beginning to tackle your debt? Why do you think this step is important?

The article recommends making at least the minimum payments and always paying on time. What can you avoid by following these two rules?

VIDEO: 4 Ways to Deal with Debt Shame

What are some potential non-financial costs to living with debt?

How might the emotional impacts described make it more difficult to manage your debt?

Why do you think it is common for people to feel shame about being in debt?

Which of these is a common predatory lending tactic to watch out for?Balloon paymentsSubscription servicesOrigination feesLoan skimming

QUESTION OF THE DAY: What percent of Americans who have credit card debt won't be able to pay it off within a year?

INFOGRAPHIC: Experian 2021 Consumer Credit Review

GRAPH: Charting 17 Years of American Household Debt

Over the same time period, the bottom 90% of workers' income rose just over 10%. How does that growth compare the growth of household debt? How might that impact workers?

What factors do you think may have contributed to the increase of these debts over time?

These graphics are examples of inferential statistics because they took a smaller sample and from those answers made inferences about the larger U.S. population. What other interesting or surprising inferences can you draw from any of these graphics?

INFOGRAPHIC: The Consequences of Unpaid Debt

Foreclosure and repossession are when you lose the rights of your property and the lender takes ownership of it. What types of loans could result in the seizure of your property?

Wage garnishment is when payments are deducted from your wages before you are paid. In general, which type of loans can lead to wage garnishment if not paid on time?

What do you think might be some other consequences of carrying unpaid debts, besides what is listed in the chart?

VIDEO: Debt Snowball vs Avalanche Method: Best Way to Pay Off Debt?

Avalanche Method:

Snowball Method:

Avalanche Method:

Snowball Method:

Which method do you think would work best for you, if you were trying to pay off debts? Explain why.

For each method, predict the order that the debts will be paid off.

Which method do you think will cost the least amount of total interest when all debts have been repaid?

Which method do you think will pay off all debts in the least amount of time?

List the debts in which order they are paid off:

At the end of 4 years, how many of the original 5 debts do you have remaining?

A standard repayment term for a student loan is typically 10 years or 120 months. How long does it take you to repay your student loan using this method?

A standard repayment term for a home loan is 30 years, or 360 months. How long does it take you to repay your mortgage using this method?

Why are your student loan and home loan paid more quickly using this method than if you had followed their standard repayment plan?

How long does it take to repay your debt now?

How much total interest do you pay on your debts?

List the debts in which order they are paid off:

If the whole point of Debt Snowball is to pay off your smallest debt first, why not devote the full $1400 each month toward that credit card, and pay it off in 3 months?

At the end of 4 years, how many of the original 5 debts do you have remaining?

What is an advantage to using the Debt Avalanche method?

What is an advantage to using the Debt Snowball method?

A friend says, “The most important thing you can do, to minimize your debt quickly, is to use the Debt Avalanche Method.” Do you agree or disagree? Explain your answer.

VIDEO: Payday Loans Explained

VIDEO: Payday Loans Can Trap Consumers With Interest Rates, Hidden Fees

How are payday loans different from other loan types you’ve learned about?

Why do you think so many people still use payday loans despite the financial dangers?

Your friend says: “Payday loans are a perfect short term fix in an emergency!” What would you say in response to your friend’s statement?

ARTICLE: Predatory Lending

Choose ONE of these practices that you think poses a significant risk to borrowers. Give a brief definition of that tactic in your own words.

Why did this tactic stand out to you?

Explain how this tactic could contribute to a cycle of debt.

ARTICLE: How to Manage Debt of Any Size

What is always the first step in beginning to tackle your debt? Why do you think this step is important?

The article recommends making at least the minimum payments and always paying on time. What can you avoid by following these two rules?

What do you think is the benefit of building up an emergency fund, even when you are working on paying off debts?

What are two options you could explore further if you find yourself overwhelmed with debt and unable to make all your payments?

VIDEO: 4 Ways to Deal with Debt Shame

What are some potential non-financial costs to living with debt?

Which of these is a common predatory lending tactic to watch out for?
Balloon payments
Subscription services
Origination fees
Loan skimming

Which of these is a common predatory lending tactic to watch out for?
Balloon payments
Subscription services
Origination fees
Loan skimming