Making the math of finance relevant to students’ lives
A recent survey sponsored by Inside Higher Education and College Pulse found that over 75% of undergraduate students will have student loan debt upon graduation. Of those students nearly half of the respondents do not know what their monthly payments will be. In the same study, about 25% of the students reported having credit debt and about 15% reported having car loans.1
Finite mathematics texts often include a chapter on the mathematics of finance, and for decades these books have covered topics such as amortization of consumer loans with an emphasis on home mortgages. Although mortgage loan examples are helpful because they often last thirty years and can involve large amounts of accrued interest, as the number of first-generation college students increase, a growing number of students do not come from families that paid a mortgage for their residence.
To make the mathematics of finance more relevant to students’ lived experiences, we emphasize examples that involve student loans, auto loans, and credit cards in Mathematics with Applications and Finite Mathematics.
Student loan examples
Even at a public university, the average amount of student loan debt in 2021 was $30,030 for a bachelor’s degree. At an interest rate of 2.75%, that leads to a monthly payment of $286.52. Over the course of 10 years, the total interest paid on the loan will be $4,352.40.
Due to the rise of interest rates since the pandemic, the interest rate for student loans will be 5.50% for the 2023-2024 year,. To demonstrate the impact this will have on monthly payments, an instructor could ask the class, “With a current interest rate of 5.50%, how much does the monthly payment increase on the same amount borrowed of $30,030 on a 10-year payment plan? How much total interest will accrue over the course of the payment plan?” The answer shows that the monthly payment increases by $39.38, which may not appear to students to be a significant increase per month, but the overall interest paid over the course of the loan will more than double, to $9,078.
Auto loan examples
The changes in the U.S. economy have also affected interest rates for auto loans. The Board of Governors of the Federal Reserve System reported that, in November 2016, the average rate for a 6-month new auto loan from commercial banks was 4.05%. In May 2023, the same group reported an average interest rate of 7.81%. How do these changes affect monthly payments and total interest payments?
To make this even more interesting, and perhaps more relevant to students’ lives, nerdwallet.com2 reported in August 2023, average auto loan interest rates by credit score and whether the automobile purchased was new or used.
|Credit Score||Average Annual Percentage Rate, new car||Average Annual Percentage Rate, used car|
|Superprime: 781 - 850||5.18%||6.79%|
|Nonprime: 601 – 660||8.86%||13.28%|
|Subprime: 501 – 600||11.53%||18.55%|
|Deep Subprime: 300 – 500||14.08%||21.32%|