Launch: Paying Off Large Debts
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Launch: “The Debt Payoff Challenge”
Scenario Overview:
Present the students with a fictional scenario where they owe a total of $10,000 in student loans across three separate loans, each with different interest rates and monthly payment requirements. Their task is to develop a repayment strategy that minimizes the total interest paid and enables them to pay off the debt as efficiently as possible.
Socratic Questions:
- What factors did you consider when deciding on your repayment strategy?
- How does interest affect the total amount you pay over time?
- What are the benefits and challenges of paying off debts quickly versus slowly?
Challenge Overview:
Students are given a scenario in which they owe $10,000 across three loans with varying interest rates. They must analyze repayment options, calculate the impact of extra payments, and create a plan that minimizes interest payments while aiming to pay off the debt quickly.
Materials Needed:
- Debt Profile Sheet: Each group will receive the following loan details:
- Loan A: $4,000 at 6% interest rate
- Loan B: $3,000 at 8% interest rate
- Loan C: $3,000 at 5% interest rate
- Monthly Income: Each group has a $1,500 monthly income to allocate. Fixed expenses (e.g., rent, groceries) total $1,200, leaving $300 for loan repayment.
- Repayment Options: Each loan has a minimum monthly payment:
- Loan A: $50
- Loan B: $75
- Loan C: $45 Students may allocate the remaining $300 as extra payments to any of the loans.
- Loan Repayment Worksheet: Includes formulas to calculate monthly interest and track total interest paid. Students will use this to monitor their repayment progress and make decisions.
- Calculators or Online Loan Payoff Calculators: These tools will help students calculate how interest accumulates and how extra payments affect the payoff timeline.
Steps:
1. Introduction (5 minutes):
- Present the scenario: “You owe $10,000 across three loans with different interest rates. Your goal is to create a repayment plan that minimizes interest paid and pays off the debt as quickly as possible.”
- Clarify the concepts of interest rates, minimum payments, and how extra payments can reduce the total interest paid over time.
2. Strategy Phase (15–20 minutes):
- Groups should analyze the loans and decide on their strategy:
- Should they pay the minimum on all loans, or make extra payments on one loan?
- If extra payments are made, which loan should they target first? Encourage discussion on different strategies:
- Debt Snowball Method: Focus on paying off the smallest balance first to build momentum.
- Debt Avalanche Method: Focus on paying off the loan with the highest interest rate first to save the most money in the long run.
3. Presentation Phase (10 minutes):
- Each group presents their repayment strategy, including:
- Which loan they prioritized for extra payments.
- How they allocated the $300 of extra payments.
- Their rationale for minimizing interest or paying off loans more quickly.
4. Reflection and Discussion (10 minutes):
- Review the groups’ strategies and compare outcomes.
- Discuss the following:
- Which strategies were most effective at saving money?
- How might emotions like motivation or the fear of debt influence their decisions?
- How important is it to balance short-term sacrifices with long-term financial benefits?
Socratic Questions for Reflection:
- Why might someone choose to pay off a smaller loan first, even if it costs more in interest?
- How does focusing on the loan with the highest interest rate impact long-term financial health?
- What other factors, such as changes in income or unexpected expenses, could influence the repayment plan?
Why It Works:
- Real-Life Skills: Students learn how interest works and are introduced to effective debt management strategies.
- Critical Thinking: The activity encourages students to think through the trade-offs between emotional satisfaction (paying off smaller loans) and financial efficiency (paying off higher-interest loans first).
- Engagement: By simulating a real-world financial challenge, students gain practical skills that are directly applicable to managing their own finances.
Optional Add-Ons:
- Bonus Scenario: Introduce a situation where students receive a $1,000 windfall (e.g., a gift or bonus). Students must decide whether to use it for debt repayment or savings.
- Unexpected Setbacks: Introduce an unexpected financial setback, like a $300 car repair or other emergency, forcing students to re-evaluate their repayment plan.
This format should provide a comprehensive, engaging, and reflective experience for the students, helping them understand the dynamics of managing student loans and making financial decisions.
