Debt: lesson plans
Understand what debt costs and pay it off in the right order. 21 lessons, about 45 minutes each, in the order students should take them.
- 1
How do credit cards work?
Each purchase is a short loan. Pay the full statement balance by the due date and you pay no interest.
Students will be able to
- A credit card spends the bank's money.
- Pay the full statement balance every month.
- The minimum payment only avoids a late fee.
45-minute plan
- Warm-up (5 min): is this true? "Carrying a small balance helps my credit score."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Open your card account or your last statement and find three numbers: the statement balance, the minimum payment and the due date. Then set autopay to pay the full statement balance each month.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
- 2
How does credit card interest work?
Interest is about your APR divided by 12 each month, charged on any balance you carry past the due date.
Students will be able to
- Divide your APR by 12.
- Pay in full and purchases cost nothing.
- Minimum payments stretch debt over years.
45-minute plan
- Warm-up (5 min): is this true? "As long as I make the minimum payment, I'm doing fine."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Open your latest card statement and find three numbers: the purchase APR, the statement balance and the minimum payment warning box. Divide the APR by 12 to get your monthly rate, then set autopay to a fixed amount above the minimum that you can keep paying every month.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
- 3
How to lower your credit card interest rate
Call your issuer and ask for a lower APR. If that fails, try a hardship program, balance transfer or credit counselor.
Students will be able to
- You can ask for a lower rate anytime.
- Six points lower saves real money.
- Six on-time payments can undo a penalty rate.
45-minute plan
- Warm-up (5 min): is this true? "My card's interest rate is set, and nothing I do will change it."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Find your current APR on your statement. Then call the number on the back of the card and ask for a specific lower rate, using the script above. Write down who you talked to and what they said.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
- 4
How does buy now, pay later work?
A pay-in-4 plan is a short loan. One can be fine, but stacked plans and missed payments get expensive fast.
Students will be able to
- Pay-in-4 means four payments, two weeks apart.
- Stacked plans add up fast.
- Credit reporting varies by provider.
45-minute plan
- Warm-up (5 min): is this true? "It's interest-free, so it's basically the same as paying cash."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Open every buy now, pay later app you use and list each plan, its next payment and its due date. Add up what is due in the next two weeks and check that your account can cover it.
- 5
Should you use the debt snowball or the debt avalanche?
The avalanche pays the highest rate first and costs less, while the snowball pays the smallest balance first and wins sooner.
Students will be able to
- Avalanche costs less, snowball wins sooner.
- Both methods pay every minimum first.
- Freed payments roll to the next debt.
45-minute plan
- Warm-up (5 min): is this true? "There's one right way to pay off debt, and I'm probably doing it wrong."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Write down every debt with its balance, APR and minimum payment. Put the list in avalanche order and in snowball order, enter it in the planner on this page, and choose one. Then set up autopay for every minimum.
- 6
Is a balance transfer worth it?
Worth it when the fee costs less than the interest you'd pay, and you clear the balance before the promo ends.
Students will be able to
- The fee is the price of 0%.
- Divide the balance by the promo months.
- New purchases can cost interest right away.
45-minute plan
- Warm-up (5 min): is this true? "A 0% balance transfer means moving my debt costs nothing."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Look up the APR and balance on your highest-rate card. Multiply the balance by 3% and by 5% to see the fee range, then run the card payoff calculator at your planned payment to see the interest you would pay by staying put.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
- 7
How does loan amortization work?
Each fixed payment covers that month's interest first. As the balance shrinks, more of the payment goes to principal.
Students will be able to
- Interest is charged on what you still owe.
- Early payments are mostly interest.
- Extra principal early saves the most.
45-minute plan
- Warm-up (5 min): is this true? "Halfway through my loan, I should owe about half of it."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Log in to one of your loans and find your balance, rate and payment. Work out this month's interest as balance × rate ÷ 12, and see how much of your payment actually lowers the balance.
Worksheet and answer keyOpen the lessonLoan payment calculator
- 8
How do personal loans work?
A personal loan is a lump sum repaid in fixed monthly payments. Compare offers by APR and total cost, including fees.
Students will be able to
- Compare loans by APR, not the rate.
- The payment stays the same every month.
- Longer terms cost more in total.
45-minute plan
- Warm-up (5 min): is this true? "The interest rate on the offer is what the loan costs me."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): If you are thinking about a personal loan, prequalify with one credit union and one other lender. Write down each APR, payment and total of payments side by side, and pick the lowest total cost you can afford each month.
Worksheet and answer keyOpen the lessonLoan payment calculator
- 9
How do car loans work?
Compare car loans by total cost, not monthly payment. Longer terms lower the payment but add thousands in interest.
Students will be able to
- Judge a loan by its total cost.
- Longer terms cost more in interest.
- 20/4/10 is a rule of thumb.
45-minute plan
- Warm-up (5 min): is this true? "What really matters is a monthly payment I can afford."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Find your current or planned car loan and write down the payment, the months left and the APR. Multiply the payment by the months left to see what you still have to pay in total.
- 10
How do student loans work?
Know which loans are federal and which are private, then pick a repayment plan you can keep up with.
Students will be able to
- Federal loans carry protections private loans lack.
- Interest builds every day you owe.
- Refinancing federal loans is a one-way door.
45-minute plan
- Warm-up (5 min): is this true? "The lowest monthly payment is always the best repayment plan."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Log in at StudentAid.gov and write down each federal loan's balance, rate, servicer and first disbursement date. Add any private loans from your credit report. Then run the Repayment Calculator to see your payment on each plan you qualify for.
- 11
Which student loan repayment plan should you choose?
Check when your loans were first paid out, then compare the fixed plan with the income-based plans you're allowed to use.
Students will be able to
- One new loan changes every loan's options.
- RAP is 1% to 10% of income.
- Tiered Standard runs 10 to 25 years.
45-minute plan
- Warm-up (5 min): is this true? "SAVE is still the plan with the lowest payment, so I'll just stay in it."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Log in at StudentAid.gov, write down each loan's type and first disbursement date, then run the Repayment Calculator with your latest tax return. Note the two plans with the lowest payment you can keep up and call your servicer to switch.
Worksheet and answer keyOpen the lessonLoan payment calculator
- 12
Should you refinance your student loans?
Refinance private loans when you can get a lower fixed rate; refinance federal loans only if you'll never need federal protections.
Students will be able to
- Refinancing federal loans can't be reversed.
- Private loans have the least to lose.
- Compare APR, term and rate type.
45-minute plan
- Warm-up (5 min): is this true? "Refinancing and federal consolidation are the same thing."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): List every student loan with its balance, rate and whether it is federal or private. StudentAid.gov shows federal loans, and your credit report shows private ones. For private loans with rates above current offers, get two or three prequalified quotes with the same term.
Worksheet and answer keyOpen the lessonLoan payment calculator
- 13
What is a good debt-to-income ratio?
DTI is monthly debt payments ÷ gross monthly income. Aim for 36% or less, including any new housing payment.
Students will be able to
- DTI uses gross income, before taxes.
- 36% or less is a common target.
- Paying off a whole debt lowers DTI fastest.
45-minute plan
- Warm-up (5 min): is this true? "My credit score is the only number lenders care about."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): List every monthly debt payment from your statements and add them up. Divide by your gross monthly income from your pay stub. If you are planning a big loan, add the new payment and see where you land.
Worksheet and answer keyOpen the lessonDebt-to-income ratio calculator
- 14
Should you cosign a loan?
Cosign only if you could make every payment yourself. You owe the full loan, and it counts on your credit.
Students will be able to
- A cosigner owes the whole debt.
- The loan counts on your credit.
- Getting released is rare.
45-minute plan
- Warm-up (5 min): is this true? "Cosigning is just vouching for someone. I'm only a backup."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): If someone has asked you to cosign, run the loan through a payment calculator and write down the monthly payment and total cost. Then ask yourself if you could pay it alone for the full term.
Worksheet and answer keyOpen the lessonLoan payment calculator
- 15
Is debt consolidation a good idea?
Consolidation helps when the new APR is lower and you stop adding debt. One payment alone doesn't save money.
Students will be able to
- Consolidation only saves money at a lower APR.
- Keep paying what you paid before.
- The old cards must stay paid off.
45-minute plan
- Warm-up (5 min): is this true? "Consolidating my debt makes it go away faster on its own."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Make a list of every debt with its balance, APR and minimum payment. Add up the balances and payments, then prequalify for one consolidation loan and compare its APR to your highest card rates.
- 16
How do payday loans work?
A payday loan charges about $15 per $100 for two weeks, roughly 391% APR. Try a credit union loan first.
Students will be able to
- A $15 fee per $100 is about 391% APR.
- Rollovers charge the fee again and again.
- Credit union PALs cap the APR at 28%.
45-minute plan
- Warm-up (5 min): is this true? "A $60 fee to borrow $400 for two weeks is not that bad."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): If you're short this pay period, call the company you owe and ask for a payment plan or a few extra days. Then call your credit union, or look one up, and ask whether it offers payday alternative loans.
- 17
How to deal with medical debt you can't pay
Get an itemized bill, apply for financial assistance, then pay on a plan. Never move a medical bill onto a credit card.
Students will be able to
- Always ask for an itemized bill.
- Nonprofit hospitals must offer financial assistance.
- Small and paid medical collections stay off reports.
45-minute plan
- Warm-up (5 min): is this true? "A medical bill is a medical bill. The amount is the amount."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Pick your largest medical bill. Call the billing office, ask for an itemized bill and the financial assistance application, and ask them to hold the account while you review it. Write down the date and the name of the person you spoke to.
- 18
What are your rights when a debt collector calls?
Collectors must prove the debt, can't call before 8 a.m. or after 9 p.m., and must stop when you ask in writing.
Students will be able to
- You get 30 days to dispute in writing.
- Calls are limited by time and count.
- A letter can stop all contact.
45-minute plan
- Warm-up (5 min): is this true? "If a collector calls, I have to pay whatever they say right away."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): If a collector has contacted you, find the validation notice or ask for one. Check the itemization against your own statements, then write down the dispute end date and put it on your calendar a week early.
- 19
Is debt settlement worth it?
Settlement can cut what you pay, but fees, missed-payment damage and taxes on forgiven debt often shrink the savings. Try counseling first.
Students will be able to
- Settlement usually starts with missed payments.
- No fees before a debt is settled.
- Forgiven debt can be taxable income.
45-minute plan
- Warm-up (5 min): is this true? "Settlement companies make my debt go away for pennies on the dollar."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): List each debt with its balance, APR and how far behind it is. Then book a free session with a nonprofit credit counseling agency and ask what a debt management plan payment would be.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
- 20
How does bankruptcy work? Chapter 7 vs Chapter 13
Chapter 7 wipes out many debts in a few months. Chapter 13 repays them over 3 to 5 years.
Students will be able to
- Chapter 7 erases debt in a few months.
- Chapter 13 is a repayment plan.
- Some debts survive bankruptcy.
45-minute plan
- Warm-up (5 min): is this true? "If I file for bankruptcy, I'll lose everything I own."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Write down every debt with its balance and who it is owed to, your monthly income and what you own. Then find two bankruptcy lawyers or a legal aid office near you that offer a free consultation and book one.
- 21
Should you pay off debt or invest?
Take the 401(k) match, pay off high-rate debt next, then invest. For low-rate debt, do both at once.
Students will be able to
- Paying off debt earns its interest rate.
- Never skip the employer match.
- Low-rate debt can wait its turn.
45-minute plan
- Warm-up (5 min): is this true? "I should be investing now, because every year I wait costs me compound growth."
- Read the lesson together (10 min)
- Work the example on the worksheet (10 min)
- Practice questions (10 min)
- Exit task (10 min): Write down every debt with its APR. Check that you are getting your full 401(k) match. Then pick the highest-rate debt above about 8% and set an extra automatic payment toward it for your next payday.
Worksheet and answer keyOpen the lessonCredit card payoff calculator
Unit vocabulary
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