Cooperatives in Your Community
Consumer Cooperatives
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2014 Version
Released: October 29, 2014
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Cooperatives in Your Community
A Curriculum for High School Students
Authors:
Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
School of Environmental and Biological Sciences, Rutgers University
New Brunswick, NJ
This publication was made possible through funding provided by the Council of
Food, Agricultural and Resource Economics (C-FARE) and funding provided
to C-FARE by the CHS Foundation. The Council for Economic Education is
a supporting partner and provided technical assistance with peer review and
marketing of the lesson plans.
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Cooperatives in Your Community
Lesson #1: Consumer Cooperatives
LESSON DESCRIPTION (Background for the Instructor)
In this lesson, the students will learn about the cooperative movement, how
cooperatives (co-ops) operate, and examples of consumer cooperatives in various
sectors of the U.S. economy (e.g., financial services, utilities, food, housing, child
care, and health care).
The lesson includes seven activities that instructors can select from where students
will: 1. Read about co-ops and answer a series of questions about them, 2. Watch
a video and answer questions about cooperatives, 3. Answer a series of True-False
questions, 4. Compare the features of deposit accounts at two banks and a credit
union, 5. Compare the cost of loans at two banks and a credit union, 6. Debrief a
skit about co-ops, and 7. Research a consumer cooperative and make a presentation
about it in class.
INTRODUCTION (Background for the Instructor)
A cooperative (co-op) is a special category of corporation (business) or
organization that is owned and operated by its members (also known as userowners). Members become part of a co-op by purchasing a required minimum
amount of shares (e.g., $25 to open a credit union share account). In the vast
majority (around 95%) of cooperatives, each member has one vote (regardless
of number of shares purchased) at the co-op’s annual business meeting. A few
cooperatives base voting rights on the amount of business volume that someone
generates. Voting systems in cooperatives are quite different from those in investorowned firms where votes are based on the level of investment or amount of shares.
The members of a co-op buy its products (e.g., food) or use its services (e.g.,
electricity) and share in profits generated by the co-op. The primary objective
of a cooperative is to provide high quality products or services at the lowest net
price to its members. Thus, co-ops exist to serve the needs of their memberowners. Increased operating efficiency is an important concern, however, to
run a successful operation. Cooperatives must cover their operating costs to
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remain viable business entities. While they are not organized to maximize profits
for outside investors, they should not be confused with non-profit 501(c) (3)
organizations whose primary purpose is to provide human services or to attain
educational, social, or philanthropic goals.
Co-ops operate according to a set of rules, called bylaws (as many organizations
do), and are governed by an elected board of directors that is chosen from among
the co-op membership. Thus, there are generally no “outside” directors as is the
case with investor-owned corporations. Co-op boards hire management and staff
to run a co-op’s day-to-day operations. While cooperatives are widespread in the
U.S. agricultural industry sector, the largest numbers of co-ops actually involve
consumer products and services, particularly credit unions and electric co-ops.
More than 100 million Americans, nearly one in three, belong to one or more
cooperatives.
While cooperatives have many unique advantages, they also have unique
challenges. The users of a cooperative must be willing and able to invest in the
firm. As in any democratic organization, there is the potential for conflict between
members. Because the board of directors is elected from the membership, they
have unique insights as customers. However, the board members may need to work
to develop business and financial skills and to fully understand the industries in
which the cooperative operates.
CONCEPTS
u Board of directors
uCooperatives
u Credit unions
u One member/one vote
u Share accounts and share draft accounts
OBJECTIVES
Students will be able to:
•Explain how cooperatives work and how they differ from investor-owned firms.
•Identify the advantages and disadvantages of cooperatives as a business entity.
•Define the terminology of cooperatives (e.g., share, patronage refund).
•Describe five different types of consumer cooperatives with an example of each
(e.g., credit union: ABC Federal Credit Union).
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CONTENT STANDARDS
Common Core State Standards for Math: http://www.corestandards.org/Math/
The Consumer Cooperatives lesson supports the Common Core State Standards
Initiative mathematics standards. Its content and learning activities link
mathematics to everyday life decision-making (e.g., loan cost calculations and
interest rate comparisons on deposit accounts). It also satisfies Common Core
number and quantity requirements.
Council for Economic Education National Standards for Financial Literacy
http://www.councilforeconed.org/wp/wp-content/uploads/2013/02/nationalstandards-for-financial-literacy.pdf
•
Buying Goods and Services-Benchmark 1 – Discuss how consumer decisions
are affected by the price of a good or service and its alternatives and by a
consumer’s income and preferences. Financial well-being is improved by
making informed spending decisions, which entails collecting information,
planning, and budgeting.
Saving-Benchmarks 2-3 – Compare and contrast credit unions versus banks in
•
explaining that interest is the price that a financial institution pays for using a
depositor’s money and it is determined by market forces and the cost of doing
business. The higher an interest rate is, the more likely people are to deposit
money and save and the less likely they are willing (and/or able) to borrow
money and spend (e.g., interest rates charged for loans and credit cards).
Saving-Benchmark 4 – Explain credit unions in the context that, when savers
•
earn a higher interest rate on their deposits, their savings will grow more
quickly.
Council for Economic Education Voluntary National Content Standards in
Economics: http://www.councilforeconed.org/wp/wp-content/uploads/2012/03/
voluntary-national-content-standards-2010.pdf.
Content Standard 2 (Decision Making) – This standard is relevant for this
lesson: Effective decision making requires comparing the additional costs of
alternatives with the additional benefits. An example would be comparing products
available at credit unions, a type of cooperative business, with those available at
commercial banks.
Content Standard 3 (Allocation) – This standard is relevant for this lesson:
Different methods can be used to allocate goods and services. People acting
individually or collectively must choose which methods to use to allocate different
kinds of goods and services.
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Content Standard 4 (Incentives) – This standard is relevant for this lesson:
People usually respond predictably to positive and negative incentives. To
understand or predict behavior of people or organizations, students must
understand the economic incentives that people or organizations face.
Content Standard 9 (Competition and Marketing Structure) – This standard is
relevant for this lesson: Competition among sellers usually lowers costs and prices,
and encourages producers to produce what consumers are willing and able to buy.
Content Standard 10 (Institutions) – This standard is also relevant and can be
used for this lesson: Institutions evolve and are created to help individuals and
groups accomplish their goals. Banks, labor unions, markets, corporations, legal
systems, and not-for-profit organizations are examples of important institutions.
Note that cooperatives could be included in the list of examples as another type of
institution that students need to understand. Credit unions and other cooperatives
are created to help individuals and groups accomplish their goals.
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TIME REQUIRED
60 to 180 minutes (depending upon content depth and number of activities that are
used)
MATERIALS
•Slides 1.1 to 1.8
•
Cooperatives Quiz
•One copy of Activity 1.1 to 1.7 for each student
Teachers are encouraged to use as many of the seven student learning activities as
possible to provide a fuller understanding of consumer cooperatives.
PROCEDURE
An introductory activity to interest students would be to ask them how they think
profits of an enterprise should be distributed. They are likely to decide that profits
should be based on how much owners invest in an enterprise. Then ask what
students think about having every investor provide the same level of investment
and having “profits” distributed based on how much they purchased from the
enterprise. Such an approach could help students open their thinking to alternative
forms of institutions, which “sets the stage” and makes a nice segue to a discussion
of cooperatives.
It is important to note that the word “profit” (i.e., a surplus of income over
expenses) should not necessarily be construed as a bad thing. Many people do not
appreciate the role of risk-taking that is necessary to grow and maintain successful
business enterprises. In addition, there are many benefits to society from allocating
resources that are derived from profits. This discussion is merely meant to stimulate
thinking about who benefits from profits: shareholders in investor-owned firms and
members in businesses that are organized as cooperatives.
1.Distribute the Cooperatives Quiz as a pre-test to assess what students already
know about cooperatives before teaching any curriculum content.
2.Explain to the students that they are going to learn about consumer
cooperatives (co-ops). Co-ops are member-owned businesses or organizations
that provide a product or service for their members. They come in a variety
of sizes from small store front operations to large corporations. More than
100 million Americans (of about 318,000,000 in 2014) participate in co-ops,
almost 1 in 3. Review slides 1.1 to 1.8.
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3.Tell the students that many commonly-used products and services can be
purchased through a co-op including checking and savings accounts, telephone
and electrical service, child care, housing, food, and health care. Yet, many
people are unaware of this type of business enterprise.
4.Distribute a copy of Activity 1.1, Cooperative Facts and Discussion
Questions. Organize the class into groups of no more than five members
each. Working together, the students should read the handout and answer the
questions at the end. Discuss the answers to the questions for discussion at the
end of Activity 1.1.
A. How do cooperatives work?
Cooperatives are businesses or organizations that are owned and operated
by members that purchase its goods (e.g., food) and services (e.g.,
utilities). People purchase shares to become co-op members and receive
the right to vote on co-op business. Co-ops come in a variety of sizes and
operate in a variety of industries.
B.What is the primary objective of cooperatives?
The primary objective of cooperatives is to provide a high quality product
or service to its members at an affordable cost. The net cost for a product
or service is the price minus the share of a cooperative’s profits that a
member receives (similar to a rebate).
C.Why do some cooperatives, such as food co-ops and nursery school coops, ask or require members to volunteer time (labor)?
Co-ops that require their members to provide a contribution of volunteer
time, as well as money to purchase shares, are able to decrease their
operational expenses. This lowers the cost of their product or service
because they do not have to hire paid staff. Another benefit of member
service is “buy in.” Co-op members may feel more invested in the co-op
when they actually work there.
D.Why do credit unions typically offer a higher interest rate on deposit
accounts and a lower interest rate on loans than commercial banks?
Credit unions exist solely to serve their member owners, not to pay high
dividends to an outside group of investors. The goal is to provide a service
rather than maximize a profit. Co-ops have to make a profit, or surplus,
over time or they may not stay in business. However, they do not have a
goal of maximizing profit. A credit union’s profits are returned to members
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and that is why credit unions can offer higher interest rates on deposits
and lower rates on loans.
E. Are there disadvantages to using credit unions? If so, what?
Under federal and state laws, credit unions may only offer membership
to individuals who have a particular affiliation relationship. The
affiliation relationship, which is called the “field of membership,” is the
commonality between credit union members. The affiliation relationship
may involve an employer, school, church, homeowner’s association
group, or other organization. In addition, credit unions generally have
fewer “brick and mortar” branch offices for face-to-face service than
commercial banks do. This might not be a big disadvantage, however, for
customers who primarily make financial transactions via direct deposit
and online transactions.
F.Why are most utility (e.g., electric and telephone) cooperatives in rural
areas?
Utility cooperatives (e.g., electric and telephone) were formed by citizens
in rural communities with sparse populations because investor-owned
utility companies would not provide service in those areas. Commercial
companies did not want to incur the high cost of running wires to a
relatively small number of homes.
G.
What are the similarities between mutual insurance companies and mutual
savings banks?
Both mutual insurance companies and mutual savings banks are financial
services businesses that are organized as cooperatives. Thus, they are
owned by their policyholders and depositors, respectively, and not by
stockholders. Profits earned in excess of operating costs and reserves are
returned to members. Costs for their products (e.g., insurance policies and
savings accounts) are generally attractive, compared to companies that
issue stock, because cooperatives are member-owned and do not have to
generate a profit for outside investors.
H. How are buyers’ co-ops able to save their members money?
Buying co-ops pool the orders of their individual members and negotiate
volume discounts from the suppliers of products and services. Discounts
for large quantity orders reduce the cost of goods and services purchased
by members.
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5.Distribute a copy of Activity 1.2, Electric Cooperatives Video. Ask students
to watch the NRECA YouTube video, NRECA: The Electric Cooperative Story,
and answer the ten questions that follow.
Video Link: https://www.youtube.com/watch?v=tenKnIx4ouY
A.In what country were cooperatives first formally organized by a group of
weavers?
England (United Kingdom); see http://weaversway.coop/pages/rochdaleprinciples for more information about the weavers and artisans who
established a sustainable cooperative and a set of operating principles
that exist to this day
B. What U.S. President led the effort to establish rural electric cooperatives?
Franklin Delano Roosevelt (FDR), U.S. President March 4, 1933-April 12,
1945
C. What is the primary purpose of cooperatives?
To serve the needs of members for products and services
D. Who selects the board of directors for cooperative businesses?
Cooperative members select members of the board of directors, generally
from among the cooperative membership
E.What federal agency was established to bring electricity to rural
Americans?
REA (Rural Electric Administration); see http://www.nreca.coop/aboutelectric-cooperatives/history-of-electric-co-ops/ for additional information
F.
How many Americans get their electric service through cooperatives?
42 million; see http://reic.uwcc.wisc.edu/electric/ for additional
information
G. How are a cooperative business meeting decisions made?
Each member who attends the meeting has one vote and the majority rules
H. What are some distinguishing features of cooperatives?
Concern for the communities that they serve, democratic control, and exist
to serve the needs of members
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I. What organization does the acronym NRECA stand for?
National Rural Electric Cooperative Association; see http://www.nreca.
coop/ for more information
J.
Describe something else that you learned from the video.
Answers will vary with each individual student or group of students.
Students may need to watch the video more than once to determine
answers for this question.
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6.
Distribute a copy of Activity 1.3, Co-op Questions. Divide the class into
groups of three or four students. To each group, distribute a sheet of cover
stock paper with a large “T” printed on one side and a large “F” printed on the
other. Give the students 10 minutes to discuss the 10 questions in their small
group and come to a consensus about the correct answer. Each group should
also choose a spokesperson.
Then, debrief the activity by asking each group spokesperson to “vote” true or
false with their sign. Discuss the answers shown below. Tabulate the number of
correct and incorrect votes and discuss each quiz item. Consider giving a small
prize to the top scoring small group(s). Do this activity after Activity 1.1 and a
glossary review.
A. A primary objective of cooperatives is to provide user benefits.
True. A primary objective of cooperatives is to provide a high quality
product (e.g., food) or service (e.g., electricity) to its members.
B.Cooperative members generally receive a vote proportionate to their
purchase of co-op products or services.
False. The vast majority of cooperatives follow a “one-member-one vote”
philosophy. A few base votes on business volume. Unlike stockholders
in investor-owned corporations, co-op members have an equal voice in
decisions, regardless of monetary investment.
C.
The origin of modern cooperative operations is most often linked to
England in 1844.
True. While rudimentary co-ops for fire insurance existed in colonial
America, the principles that modern co-ops operate by today are
attributed to the Rochdale Society of Equitable partners in Manchester,
England
D.All co-op members in good standing can vote in elections for co-op
directors.
True. Cooperatives are owned and democratically operated by their
members.
E.
Generally, unless exceptions are made, co-op directors are co-op members.
True. Co-op directors are generally elected from among the co-op
membership. This way, the directors have a familiarity with, and personal
stake in, the way that the co-op is managed.
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F. A for-profit community bank is an example of a cooperative.
False. Community banks are investor-owned corporations that seek to
maximize the returns of their investor shareholders.
G. Cooperatives are owned and operated by their members.
True. Democratic member control is a core principle of cooperatives. Coops consist of members who buy their goods and services and participate
in policy decisions.
H.In cooperative corporations, earnings are taxed twice on both corporate
and individual (member) tax returns.
False. Co-ops have a “pass-through” designation from the IRS. This
means that net earnings that are distributed to members are not taxable
at the cooperative level. In consumer cooperatives, patronage refunds
may not be taxable to members if they relate to the purchase of household
expenditures. Patronage refunds from all other cooperative purchases in
agricultural cooperatives and business cooperatives are taxable to the
member.
I.Cooperatives distribute patronage refunds from net earnings based on how
much a member used the co-op’s products and services.
True. When co-ops return surplus income (profit) to members, this is
called a patronage refund. Patronage refunds, as the name implies, are
based on a member’s patronage; i.e.; how much he or she spends on the
product or service offered by the co-op. For example, if a co-op has a
profit margin of $10,000 to distribute for the year and Jane Smith accounts
for five percent of the co-op’s business, she would receive a patronage
refund of $500 ($10,000 x .05%). Patronage refunds are generally taxable
to recipients as ordinary income in the year that they receive them.
J.Cooperatives that provide utility services (e.g., electricity and telephone
service) are more commonly found in densely populated cities.
False. Utility cooperatives are typically found in rural areas with sparse
populations. They were formed by citizens in these areas when investorowned corporations would not provide service where they lived due to the
high cost of running wires to a relatively small number of homes. The type
of cooperative that is common in densely populated cities is the housing
co-op where members receive a place to live in exchange for the purchase
of shares of stock of the cooperative corporation.
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7.Distribute a copy of Activity 1.4, Two Banks and a Credit Union: Deposit
Account Edition. Divide the class into groups of three of four students. Ask the
small groups to go online to compare the features of deposit (i.e., checking and
savings) accounts at two local banks and a credit union. Debrief the activity
by discussing differences between banks and credit unions in terms of cost,
convenience, and other features.
It is likely that the students will find higher interest rates paid on checking and
savings accounts and CDs at the credit union than at the banks, perhaps with
the exception of some online banks. Explain that this is because credit unions
are member-owned and do not have to make a profit for outside investors like
banks do.
Note that it may take students a bit of work to find comparable products
and required minimum balances to do this activity. Also, it is possible that
differentials among bank and credit union products may vary with different
account balances. Check the web sites of banks and credit unions in your
community, before assigning this activity, and see how difficult it is to find this
information.
8.Distribute a copy of Activity 1.5, Two Banks and a Credit Union: Lending
Edition. Divide the class into groups of three of four students. Ask the
small groups to read the case study, complete the chart, and answer the
accompanying questions. When they have finished, discuss the completed
chart and the answers to the questions.
Below are the answers for the completed chart and the questions that follow:
Lender
Far Away National
Bank
Hometown
Community Bank
Friendly Federal
Credit Union
APR
Finance
Charge
Total Cost
Monthly
Payment
5.0%
$ 947.40
$ 12,947.40
$359.65
4.5%
$850.56
$12,850.56
$356.96
4.0%
$754.44
$12,754.44
$354.29
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Questions:
A. Which car loan is the best deal?
Friendly Federal Credit Union has the lowest interest rate (APR), the
lowest finance charge, the lowest total cost, and the lowest monthly
payment.
B.Which car loan is the worst deal?
Far Away National Bank has the highest interest rate (APR), the highest
finance charge, the highest total cost, and the highest monthly payment.
C. Why did the loan that provided the best terms do so?
Credit unions operate for the benefit of their members. With no incentive
to maximize profits for shareholders, like investor-owned banks have, they
generally charge lower costs for loans and pay higher interest on savings
than banks. Co-ops do have to make a profit or surplus over time, however,
to stay in business and to fund capital investments that are needed by the
co-op. Like many types of operations, the cost of future investment may be
included in the present cost of doing business.
D. How much did Jennifer save by taking the best deal instead of the worst
deal?
$192.96 ($12, 947.40 - $12, 754.44)
E. How could Jennifer have saved even more money on her car purchase?
She could have paid cash for the car and not incurred any interest charges
at all (but there would be an opportunity cost for the next best alternative
for the cash spent to buy a car). Another option is to shop around some
more to find even lower interest rates than those stated above. A third
option is to take out a loan for a shorter time period (e.g., 24 months),
which would reduce the interest charged.
F. Where can Jennifer find information about the monthly cost of car loan
payments?
Students will likely share a variety of responses. Three good online
loan calculators are available through FINRA (http://apps.finra.org/
Calcs/1/Loan) and Bankrate.com (http://www.bankrate.com/calculators/
mortgages/loan-calculator.aspx) and Auto Loan Calculator (http://www.
autoloancalculator.com/).
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G. What are the pros and cons of using banks and credit unions?
Banks often have many conveniently-located branches and a wide array of
financial services but their costs are generally higher than those of credit
unions because they are profit-driven. Credit unions have lower costs
than banks and higher rates of interest on savings, but require some type
of affiliation relationship to become a member and generally have fewer
offices where consumers can transact business and fewer types of financial
services.
H. What are the take-away messages from this activity?
1. Follow the “Rule of Three” when making a purchasing decision by
comparing three product providers, 2. The lower the interest rate on a
loan, the lower the total cost, and 3. Credit unions generally charge a
lower APR on car loans than banks.
9.Distribute a copy of Activity 1.6, A Conversation About Co-ops. Ask for four
volunteers to read the speaking parts of Brittany, Carlos, Matthew, and Bella,
respectively, in a short skit about cooperatives. Then debrief the activity by
having small groups discuss follow-up questions and debriefing them with the
entire class.
A. What are the advantages and disadvantages of belonging to a food co-op?
Many food co-ops sell organic foods and provide them to members at an
attractive price. Food co-ops, like supermarkets, also buy food in bulk
which lowers member costs. A disadvantage of food co-ops, for some
people, might be a member service requirement (e.g., stocking shelves,
ringing up sales, dividing up bulk food orders) that helps lower food
costs. In addition, food co-ops are not as plentiful as supermarkets and
may require driving a distance to pick up food and fulfill the service
requirement.
B. What are some reasons why people choose to belong to food co-ops?
Food co-op members are often health-conscious people who are interested
in purchasing unprocessed and organically grown foods. Food co-ops
provide them with an opportunity to meet and work with like-minded
people and to purchase the food that they are looking for at an attractive
price because the co-op buys it in bulk. There is also often a social
dimension to food co-op membership that members enjoy.
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Note, however, that most large chain grocery stores now carry organic
foods and/or bulk food items, mostly because co-ops demonstrated that
there was demand for such items. The price that food co-ops charge is
often higher than what is charged at large grocery stores because large
chains buy in larger quantities than local food co-ops.
C. What are the advantages and disadvantages of credit unions?
Advantages of credit unions include higher interest rates on savings
and lower interest on loans than banks and an opportunity to affect
a credit union’s policy-making decisions through member ownership.
Disadvantages of credit unions include the need to meet member
qualifications to join and the fact that credit unions do not have nearly the
number of branches that banks do. This can make them inconvenient for
people who need to visit a credit union frequently to cash checks and make
ATM withdrawals.
D. What are some reasons why people choose to belong to credit unions?
For many people, credit unions are affiliated with their place of
employment which makes them convenient for direct deposit and
automatic savings. Branches might be located right in the building where
they work. Other people are drawn by their lower cost compared to banks.
In the aftermath of the 2007-2009 financial crisis, there was a backlash
by some people against the fees charged by “big national banks” and
credit unions, along with community banks, were touted as a lower-cost
alternative.
E. Do cooperatives always save people money?
Not always. There are certain to be cases sometimes when banks charge
less than credit unions or supermarkets charge less than food co-ops,
for example. For many people, however, price is not the only factor that
they consider when purchasing products and services from a cooperative
business. Quality products and services and dependable service are also
important as is personal service (e.g., credit union members are more
often recognized personally by name).
F. Does anyone in your family belong to any type of cooperative?
Answers will vary among groups of students. Instructors should do an
online search for cooperatives in their community so they will recognize
the names that are discussed.
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Distribute a copy of Activity 1.7, Co-ops in the News. Divide the class into
groups of three of four students. Ask the small groups to go online and find a
news article about a specific consumer cooperative business and then visit the
cooperative’s Web site for additional information. Each group should also choose
a spokesperson.
Ask each spokesperson to provide a 2 to 3 minute summary about the co-op that
the group selected including its industry sector, location, number of members,
membership requirements, products and services, and other notable features.
An alternative learning activity would be to turn assignment 1-7 into a written
assignment or extra credit activity where students would be asked to write a 1 to
2-page paper or school newspaper article describing what they learned during
their online investigation of cooperatives in the news.
Note that not all cooperatives provide information on membership costs, total
number of members, or trade area on their web sites. You can still encourage
students to make their best inferences. A student visiting a consumer cooperative
web site can probably infer that it has a large number of members while a local
food cooperative would have much fewer. You can also ask students to consider
what they would pay to join a particular type of cooperative.
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CLOSURE
Ask students if they have any remaining questions about cooperatives. Encourage
them to check with their parents to see if they are one of the approximately one in
three U.S. households who are members of a cooperative business. Many people
belong to cooperatives, or purchase their products and services, and don’t even
know it.
GLOSSARY
Cooperative – A member-owned business or organization that is operated by the
people that use its products and/or services.
Credit Union – A member-owned financial cooperative that is controlled by its
members and provides a range of financial services such as checking and savings
accounts, credit cards, and loans.
Member – Also known as a user-owner, a member is a person who meets
qualifications for membership in a co-op (e.g., place of employment, place of
residence) and purchases a required number of shares to belong.
One Member/One Vote – A core principle of the democratic organization
of cooperatives where each member gets one vote on cooperative business
decisions (e.g., election of directors) regardless of their monetary investment in
the cooperative. All votes are weighted equally. By operating in this manner, a
select few members who are large investors cannot dominate the decision-making
process.
Pass-Through Entity – Term used to describe the fact that cooperatives that
comply with IRS rules do not pay federal income taxes as a business entity. Surplus
earnings returned to members are taxed only once at the individual level on
members’ income tax returns and not at both the corporate level and the individual
level. Thus, co-ops differ from other businesses where corporate stock dividends
are taxed twice.
Patronage Refund – Term used to describe a return of profits to co-op members
based on how much they have used a co-op’s products and services (i.e., their
patronage). Like corporate boards of directors with stock dividends, co-op
boards can distribute cash refunds to members or retain a portion for business
reinvestment.
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Profit – Term used to describe the situation where a co-op generates a surplus of
income over expenses. When this happens, profits are returned to co-op members
(and occasionally non-members, depending on a co-op’s bylaws) in the form of
patronage refunds based on how much they use the co-op’s products and services.
Share – Individuals’ portion of a cooperative organization that establishes them as
an equal member/owner. All members’ shares are exactly equal.
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ASSESSMENT
Instructors are encouraged to use the 20-question multiple choice and 10 truefalse question quiz and two short answer questions below as a pre-and post-test to
determine gains in student knowledge about cooperative businesses after teaching
this lesson.
Correct answers to the multiple choice questions are shown in boldface type.
Multiple Choice Questions
1.Members can become part of a cooperative through the purchase of
a.dividends
b.shares
c. patronage refunds
d. cooperative reserve funds
2.
Cooperatives are governed by
a. a manager and staff
b. a President
c. a Board of Directors elected from the membership
d. outside investors who purchase stock shares
3.
Day to day operations of cooperatives are run by
a. a manager and staff
b. a President
c. an elected Board of Directors
d. outside investors who purchase stock shares
4.The return of profits to co-op members proportionate to their use of a co-op’s
goods and services is called a
a.dividend
b.rebate
c. profit exchange
d. patronage refund
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5.
The primary purpose of consumer cooperatives is to
a. produce a profit
b. increase market share
c. provide tax-exempt income to members
d. deliver goods and services to members at affordable prices
6.A person who both shops at and has an ownership interest in a cooperative is
called
a. an approved investor
b. a member
c. an affiliated user
d. a director
7.The origin of the procedures that modern day cooperatives operate by is
attributed to
a. Mutual of Omaha Insurance
b. National Farmer’s Cooperative
c. Rochdale Society
d. Wal-Mart and Sam’s Club
8.A document created by members of a co-op to describe membership
requirements and responsibilities and operating procedures is called
a.bylaws
b. IRS code ruling 72(t)
c. a LLC
d. an industry permit
9.
Members have direct input into the operations of a cooperative by
a. answering membership surveys
b. receiving co-op newsletters
c. buying co-op products and services
d. voting at annual meetings
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10. Which of the following is a benefit of belonging to cooperatives?
a. Provides tax deductions for members
b. Provides access to products and services at affordable prices
c. Generates capital gains for investors
d. Members provide day-to-day management of co-op operations
11.Which of the following is the name for a member-owned financial institution
with checking and savings accounts?
a. Community savings bank
b. Commercial bank
c. Credit union
d. Savings and Loan Association
12. Cooperatives can simply be defined as a
a. type of non-profit organization
b. special category of business operation
c. charitable organization designed to help people in need
d. government-sponsored business operation
13. The first modern day cooperative business model was formed in England in
a.1784
b.1844
c.1894
d.1924
14.What types of people do cooperatives have that other types of businesses do
not?
a.Members
b.Shareholders/investors
c. Board of Directors
d. Management and staff
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15.How many votes do those who attend cooperative business meetings typically
have?
a. Twice the voting rights of cooperative management and staff
b. It depends on the amount of their monetary investment in the cooperative
c. It depends on the amount of cooperative products/services that they buy
d. One vote per member regardless of monetary investment
16.How many levels of IRS federal income tax are there on surplus earnings
returned by cooperatives to their owner-users?
a.0
b.1
c.2
d.3
17.Approximately what proportion of Americans belongs to one or more
cooperatives?
a. 1 in 2
b. 1 in 3
c. 1 in 4
d. 1 in 5
18.Which is NOT a reason for people to belong to a cooperative?
a. Obtain an affordable product or service
b. Obtain a high-quality product or service
c. Have a say in how a product or service is delivered
d. Maximize profit on their monetary investment
19. The name used for credit union checking accounts is
a. share account
b. share advantage account
c. share draft account
d. share plus account
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20.Which word is often used in the names of cooperative banks and insurance
companies?
a.Cooperative
b.Mutual
c. Affiliated
d.Unity
True-False Questions
1. Cooperatives do not have to cover all of their operating costs to remain viable
entities because they are non-profit. (FALSE: Cooperatives must cover
operating costs)
2. The largest numbers of cooperatives are in the U.S. agricultural industry
sector. (FALSE: The largest numbers of cooperatives involve consumer
products and services)
3. Some cooperatives require their members to provide a contribution of
volunteer time. (TRUE: Volunteer service lowers the cost of cooperative
products and services)
4. Utility cooperatives are generally located in urban areas with large
populations. (FALSE: Utility cooperatives are generally located in sparsely
populated rural areas)
5. Some rudimentary cooperative-like entities were formed to provide fire
insurance in the U.S. during colonial times. (TRUE: Benjamin Franklin is
credited with being associated with these initial cooperative ventures)
6. People who belong to cooperatives must wait until the annual business meeting
to join or leave. (FALSE: People can join or leave a cooperative at any time
without affecting its business operations)
7. Some cooperatives have recognizable names due to national advertising for
products or services that they sell. (TRUE: Examples include Nationwide
and Mutual of Omaha insurance and Land ‘O Lakes butter)
8. Credit unions often pay higher interest rates on deposit accounts than
commercial banks do. (TRUE: Unlike commercial banks, credit unions do
not have to earn a profit for shareholders)
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9. Mutual insurance companies return profits in excess of operating costs and
reserves as dividends to their policyholders. (TRUE: Mutual insurance
companies are owned by their shareholders)
10. Housing cooperatives are generally located in rural areas with sparse
populations. (FALSE: Housing cooperatives are generally located in
densely populated urban areas)
Short-Answer Questions
1.Describe why a credit union is a type of cooperative business.
Credit unions are owned and democratically controlled by their members.
They elect directors from among their members and every member has one
vote regardless of the size of their account balance.
2. Besides a credit union, list three different types of cooperative businesses.
Answers will vary with each student and can include agricultural co-ops,
food co-ops, utility co-ops, housing co-ops, child care co-ops, funeral co-ops,
mutual insurance companies, and mutual savings banks.
Constructed Response Items
1.What factors should people consider before joining a cooperative?
Students should discuss the location of their residence (i.e., is it within
the territory of a cooperative utility company?), quality of service, time
commitment, and cost.
2.Do any of your family members belong to a cooperative? If so, describe which
one and what you know about it.
Responses will vary with each individual student. Instructor should become
familiar with local cooperatives to verify the accuracy of students’ responses.
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REFERENCES
About Co-ops (2012). Washington, DC: National Cooperative Business
Association. Retrieved from http://www.ncba.coop/.
Buying Groups and Co-ops: The More the Merrier (and Cheaper) (2013).
Startup Nation. Retrieved from http://www.startupnation.com/businessarticles/3714/1/buying-groups-coops.asp.
Consumer Cooperative. (2013). Wikipedia. Retrieved from http://en.wikipedia.org/
wiki/Consumer_cooperative.
Consumer Cooperatives (n.d.). Washington, DC: Consumer Federation of
America. Retrieved from http://www.consumerfed.org/about-cfa/consumercooperatives.
Consumer Cooperatives: Part of Our American Fabric. Washington, DC:
Consumer Federation of America: http://www.consumerfed.org/pdfs/coop.
pdf.
Cooperative. (2013). Washington, DC: U.S. Small Business Administration.
Retrieved from http://www.sba.gov/content/cooperative.
Cooperative Vocabulary (2012). Retrieved from http://cultivate.coop/wiki/
Cooperative_Vocabulary.
Cooperatives (2013), College Park, PA: Penn State Extension. Retrieved from
http://extension.psu.edu/business/ag-alternatives/marketing/cooperatives.
Cooperatives and Profit: What is the Relationship? Retrieved from http://www.
wedge.coop/newsletter/february-march-1997/cooperatives-and-profit-whatis-relationship.
Food Co-ops (2012). Washington, DC. National Cooperative Business Association.
Retrieved from http://www.ncba.coop/ncba/about-co-ops/co-op-sectors/144food-co-ops.
Health Care Cooperatives: Definitions and State Examples (2011). Washington,
DC: American Academy of Family Physicians. Retrieved from http://www.
aafp.org/dam/AAFP/documents/advocacy/coverage/insurance/ES-HealthCare
CooperativesDefinitionsandStateExamples-032311.pdf.
High School Cooperative Syllabus (2012). eXtension. Retrieved from http://www.
extension.org/pages/63097/high-school-cooperative-syllabus#.UfqBktrD-M8.
25
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How Agricultural Cooperatives are Taxed (1995). University of Missouri
Extension. Retrieved from http://extension.missouri.edu/p/G903.
How Housing Cooperatives Work (n.d.). Retrieved from http://home.
howstuffworks.com/real-estate/housing-cooperatives.htm.
Organize a Child Care Co-Op. (2006). Retrieved from http://voices.yahoo.com/
organize-child-care-co-op-114775.html.
Patronage Dividends: A Primer (2008). Retrieved from http://www.
cooperativegrocer.coop/articles/2009-07-14/patronage-dividends-primer.
Tax Treatment of Cooperatives (n.d.). Retrieved from http://www.rurdev.usda.gov/
rbs/pub/cir23/CIR23.html.
Teaching Cooperatives (2010). Cultivate.Coop. Retrieved from http://cultivate.
coop/wiki/Category:Teaching_cooperatives.
The structure of cooperatives (2011). U.S.D.A. Rural Development. Retrieved
from http://www.rurdev.usda.gov/supportdocuments/CIR45_3.pdf.
Understanding Cooperatives. (n.d.) Win-Win Solutions – Unit 3. Retrieved
from http://equalexchange.coop/sites/default/files/import/pdfs/downloads/
curriculum/EEcurriculum_Unit3.pdf.
Understanding Cooperatives-Quiz 5 Answers. (n.d.) U.S.D.A. Rural Development.
Retrieved from http://www.cooperativenetwork.coop/wm/education/
youthprograms/web/USDACurriculum_MNedition/unit5/quizanswers5.htm
What is a cooperative? (2013). Kansas State University. Retrieved from http://
accc.k-state.edu/coops101/whatiscoop.html.
What are patronage refunds? (1993). Washington, DC: U.S. Department of
Agriculture. Retrieved from http://www.rurdev.usda.gov/rbs/pub/cir9.pdf.
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LEARNING ACTIVITY WEB SITES
Live Cooperative Activity: http://www.extension.org/sites/default/files/live%20
coop%20activity.pdf.
This activity is a hands-on mock cooperative experience that teaches students how
cooperatives work, how they are governed, and how they benefit their members.
Net Income Worksheet Activity: http://www.extension.org/sites/default/files/
Net%20Income%20Distribution%20Wksht.pdf
This activity provides a hands-on experience to help students understand how net
income from a cooperative is distributed to members.
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OPTIONAL LEARNING ACTIVITIES
uFor extra credit or as an additional student learning activity, ask students to
visit a consumer cooperative in their community and provide an oral or written
report on their interview with co-op management and/or members.
uAsk students to identify cooperatives in their area (e.g., town, city, or county).
Encourage them to contact a local co-op, introduce themselves, describe the
project they are working on, and request additional information about the
cooperative.
uInvite a guest speaker from a local cooperative to visit your class to discuss
how cooperative businesses operate. For example, a director or employee of a
food co-op or credit union can discuss “real world” examples of cooperative
practices.
uAsk students the following question: Why don’t we see more co-ops if they are
so good?
Answers could include the need to organize people with some type of a
common relationship, very specific regulatory requirements, and consumer
needs that are being adequately met by investor-owned corporations.
uAsk students the following question: Where would you expect more
cooperatives to form?
Answers could include pre-formed groups of people, such as churches and
places of employment, and rural areas that are underserved by investor-owned
corporations.
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Cooperatives in Your Community
What is a Consumer Cooperative (Co-op)?
Consumer Cooperatives Lesson
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What is a Cooperative (Co-op)?
• Business/organization owned and operated by
its customer members
• Exists to provide
products or services
to members
• Involves both
consumer and
agricultural
industries
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Co-op Facts
• More than 100 million
Americans belong to one or
more cooperatives (about 1 in 3)
• Largest number of co-ops
involve consumer products and
services
• Vary in size from small store
fronts to large national level
businesses
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More Co-op Facts
The objective of cooperatives is to provide high
quality products or services at the lowest net
price to members.
They are a special category of corporations.
Profits are returned to members via patronage
refunds based on members’ purchase or use of
co-op products and services.
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Co-op Governance
• One member/one vote
(democratic decisions)95% of cooperatives; a
few vote by business
volume
• Elected board directors
from among membership
• Generally, there are no
“outside” directors as is
the case with investorowned corporations
• Elected board hires
management and staff
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Co-op History
• Ben Franklin started a co-op to
provide fire insurance for homes
• Modern co-op model attributed to
Rochdale Society in 1844 in Manchester, England
– Developed a set of organizing principles
• Some consumer co-ops have recognizable names
– REI (Recreation Equipment Inc.)
– Nationwide Insurance
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Types of Consumer Co-ops
• Health care co-ops
• Mutual insurance
companies
• Wholesale distribution
co-ops
• Buying co-ops
• Funeral co-ops
• Student housing and
bookstore co-ops
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Types of Consumer Co-ops
• Credit unions
• Electrical co-ops
• Telephone co-ops
• Housing co-ops
• Food co-ops
• Child care co-ops
• Nursery school co-ops
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Credit Unions vs. Banks
Credit Union
• Owned by customer members
• Similar products and services to
banks
• Return profits to members
resulting in favorable interest
rates for savings and loans
• Fewer “brick & mortar” locations
than banks
• Requires some type of
membership affiliation
relationship
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Credit Unions vs. Banks
Commercial Bank
• Financial institution owned by
investing stockholders
• Often charge higher interest on
loans and pay less interest on
savings than credit unions (to
provide a return on investment
to stockholders)
• Generally have more
convenient branch access than
credit unions
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Credit Unions vs. Banks
Credit Union
Commercial Bank
• Owned by customer members
•
•
•
•
• Financial institution owned by
investing stockholders
Similar products and services to
banks
• Often charge higher interest on
loans and pay less interest on
Return profits to members
savings than credit unions (to
resulting in favorable interest
rates for savings and loans
provide a return on investment
to stockholders)
Fewer “brick & mortar” locations
than banks
• Generally have more
convenient branch access than
Requires some type of
credit unions
membership affiliation
relationship
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Some Co-ops Require Members to
Volunteer Service
• Common among food and
nursery school co-ops
• Member volunteer labor
reduces operating costs
• Lower costs passed on to
co-op members
• Volunteer service can build
member camaraderie
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Glossary of Cooperative Terms
• Cooperative
• Credit Union
• Member
• One Member/One Vote
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More Cooperative Terms
• Pass-Through Entity
• Patronage Refund
• Profit
• Share
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Questions About Cooperatives?
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Activity 1.1
Cooperative Facts and Discussion Questions
Cooperatives (also known as co-ops) can be found around the world. A cooperative
is a business or organization that is owned and operated by its members. Co-ops
come in a variety of sizes from small store front operations to large corporations.
More than 100 million Americans (of about 318,000,000 in 2014) participate in coops. That translates to about one in three Americans having a co-op affiliation as an
employee or customer.
The cooperative form of business ownership has been in existence for centuries.
Ben Franklin is credited with forming America’s first successful co-op to provide
fire insurance for homes. The modern cooperative business model is attributed to
formation of the Rochdale Society of Equitable Partners in England in 1844. A set
of organizing rules called the “Rochdale Principles” became the basis for how coops still operate.
Members become part of a co-op by purchasing a required minimum amount of
shares (e.g., $25 to open a credit union share account). The vast majority (about
95%) of cooperatives follow a “one member-one vote” philosophy. Each member
has one vote (regardless of the dollar amount of shares purchased) at the co-op’s
annual business meeting so members share equally in the decision-making process.
A few cooperatives base voting rights on the amount of business volume. Some
co-ops have a work requirement for members, such as members of a food co-op
working a certain number of hours to run the cash register or stock store shelves.
For other co-ops, service hours are not required and members’ activities are limited
to product use and attending the annual business meeting and voting on business
items.
The members of a co-op buy its products (e.g., food) or use its services (e.g.,
electricity) and share in profits generated by the co-op. Maximizing profit is not
the primary purpose of a co-op, however. Provision of an affordable, high quality
product or service for co-op members is. Thus, co-ops exist to serve the needs
of their member-owners. Cooperatives must be profitable, however, to remain in
operation. Co-ops are governed by an elected board of directors that is generally
chosen from among the co-op membership. Co-op boards then hire management
and staff to run a co-op’s day-to-day operations. While cooperatives are widespread
in the U.S. agricultural industry sector, the largest numbers of co-ops involve
consumer products and services, particularly credit unions for financial services
and utility co-ops for telephone and electric service. Members can freely join or
leave a co-op (e.g., when they move) without affecting its business operations.
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Some co-ops have widely recognizable names from advertising for the products
that they sell including Ace Hardware (hardware stores), Nationwide Mutual
Insurance Company (property insurance), Cabot Creamery (cheese), Land
O’Lakes (butter), and Sunkist Growers, Inc. (citrus fruit). For a list of cooperative
enterprises worldwide, see http://en.wikipedia.org/wiki/List_of_cooperatives.
Types of Consumer Cooperatives
Type of
Cooperative
Credit Unions
Description of Cooperative Enterprise
A credit union is a member-owned financial services
cooperative offering a wide range of services including
checking and savings accounts, certificates of deposit, and
loans. Over 86 million consumers belong to more than
9,000 credit unions nationwide.
Credit unions often pay higher interest rates than for-profit
banks on deposit accounts and charge lower interest and
fees on loans.
Members have a common bond such as an employer,
church, or community. Since members are required to
purchase a minimum number of shares for a certain
amount (e.g., $25) to open an account, credit union
savings accounts are called share accounts and credit
union checking accounts are called share draft accounts.
Utility Cooperatives Utility cooperatives exist to provide electrical and
telephone service to their members who often live in rural
areas with sparse populations. They service more than 30
million people nationwide.
Housing
Common in densely populated areas, such as New York
Cooperatives
City, housing cooperatives provide members a place to
live in exchange for the purchase of shares of stock of the
cooperative corporation. Monthly fees for maintenance of
common areas are also charged. When members want to
move, they sell their shares back to the corporation. Over
one million U.S. families live in housing co-ops.
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Food Cooperatives
Child Care
Cooperatives
Nursery School
Co-ops
Health Care
Cooperatives
Food cooperatives exist to distribute food to their members.
They are common in large cities and college towns. Some
food co-ops limit their product line to organic foods only
and members may need to provide service hours. Over
three million Americans are serviced by almost 5,000 food
co-ops. Food is often purchased in large bulk quantities and
packaged into smaller portions by members, which helps
members stretch their food dollars.
It should be noted, however, that many large grocery store
chains today also stock organic and bulk foods. These
stores may charge lower prices for organic foods than food
co-ops due to their ability to buy food in larger quantities.
Child care co-ops are informal organizations of parents
that take turns caring for each other’s children according
to a pre-determined set of guidelines. They are common in
local neighborhoods and small communities where families
know one another. In effect, members barter child care
services with one another. About half a million families
participate in child care co-ops nationwide.
Nursery school co-ops are nursery schools that are owned
and operated by the parents of children enrolled in the
school. Parents determine school policies and provide
services to the school such as staffing fundraising events,
maintaining equipment, and serving as teacher’s aides in
the classroom.
Parental involvement reduces the cost of operating a
nursery school and the savings is passed along to parents in
the form of lower enrollment fees.
Health care cooperatives provide health care services for
their members with a focus on high quality care at the
lowest cost. Some actually own health care facilities and
employ doctors. Three service models exist: consumerowned cooperatives, worker-owned cooperatives, and
purchasing/shared services cooperatives where independent
businesses band together. Over one million people
nationwide receive health care services through co-ops.
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Mutual Insurance
Companies
Mutual Savings
Banks
Wholesale
Distribution
Cooperatives
Buying Co-ops
A mutual insurance company is an insurance company
owned by its policyholders, as opposed to a stock insurance
company that is owned by investors that purchase its stock.
Profits earned by a mutual insurance company in excess of
operating costs and reserves are returned to policyholders in
the form of dividends.
Several dozen insurance companies, some with well-known
names, operate in this fashion (e.g., Mutual of Omaha,
Liberty Mutual, Nationwide Mutual Insurance Company).
A mutual savings bank is a financial institution owned by
its account owners, as opposed to banks that sell stock
shares to investors. Originally designed to serve lowincome consumers, mutual savings banks offer interestearning checking and savings accounts. Over the years,
many mutual savings banks have failed, merged, or been
converted to stock-issuing commercial banks.
About 600 mutual savings banks remain in existence,
located primarily in the eastern U.S. Profits earned in
excess of operating costs and reserves are returned to
depositors.
This type of cooperative supplies products to its member
stores so they can leverage their buying power. The largest
co-op of this type in the U.S. is Wakefern Food Corporation
which is owned by 43 independent grocers that operate
more than 220 Shop rite supermarkets in eight eastern
states. The Wakefern co-op supplies groceries to its member
stores and marketing support services.
Buying co-ops are organized groups that buy items in bulk,
thus providing members with the leverage to negotiate
lower prices for goods and services and coordinate
marketing efforts. The types of products purchased by
buying co-ops vary widely and include sporting goods,
pharmaceuticals, and office supplies.
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Funeral Co-ops
College Campus
Co-ops
Funeral co-ops provide their members with affordable final
arrangements and the ability to shop for funeral services
(e.g., burial, cremation, caskets) without sales pressure.
Campus co-ops typically provide services related to
textbook sales, food, and housing for student members.
Questions for Discussion:
A. How do cooperatives work?
B. What is the primary objective of cooperatives?
C.Why do some cooperatives, such as food co-ops and nursery school co-ops,
ask or require members to volunteer time (labor)?
D.Why do credit unions typically offer a higher interest rate on deposit accounts
and a lower interest rate on loans than commercial banks?
E. Are there disadvantages to using credit unions? If so, what?
F.Why are most utility (e.g., electric and telephone) cooperatives located in rural
areas?
G.What are the similarities between mutual insurance companies and mutual
savings banks?
H. How are buying co-ops able to save their members money?
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Activity 1.2
Electric Cooperatives Video
Watch the YouTube video NRECA: The Electric Cooperative Story and answer the
following ten questions: https://www.youtube.com/watch?v=tenKnIx4ouY
A.In what country were cooperatives first formally organized by a group of
weavers?
B. What U.S. President helped rural electric cooperatives get their start?
C. What is the primary purpose of cooperatives?
D. Who selects the board of directors for cooperative businesses?
E.What federal agency was established to provide loans for the construction of
electric distribution systems that brought electricity to rural Americans?
F. How many Americans today get their electric service through cooperatives?
G. How are cooperative business operating decisions made?
H. What are some distinguishing features of cooperatives?
I. What organization does the acronym NRECA stand for?
J. Describe something else that you learned from the video.
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Activity 1.3
Co-op Questions
Form groups of three or four students. You will then be given a sheet of cover stock
weight paper with a large “T” printed on one side and a large “F” printed on the
other.
Take 10 minutes to discuss the 10 quiz items below and come to a consensus about
the correct answer for each statement.
Choose a spokesperson to report your answers to the total group by holding up the
“T” (True) or “F” (False) side of your sign. Be prepared to defend your answer.
A. A primary objective of cooperatives is to provide user benefits.
B.Cooperative members generally receive a vote proportionate to their purchase
of co-op products or services.
C.
The origin of modern cooperative operations is most often linked to England in
1844.
D. All co-op members in good standing can vote in elections for co-op directors.
E. Generally, unless exceptions are made, co-op directors are co-op members.
F. A for-profit community bank is an example of a cooperative.
G. Cooperatives are owned and operated by their members.
H.In cooperative corporations, earnings are taxed twice on both corporate
(cooperative) and individual (co-op member) tax returns.
I.Cooperatives distribute patronage refunds from net earnings based on how
much a member used the co-op’s products and services.
J.Cooperatives that provide utility services (e.g., electricity and telephone
service) are more commonly found in densely populated cities.
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Activity 1.4
Two Banks and a Credit Union: Deposit Account Edition
Form groups of three or four students. Make a list of local financial institutions
and search the web sites for two local banks and a credit union to gather information about features of their CDs and deposit accounts (i.e., checking and savings
accounts). Discuss differences between the two banks and credit union in terms of
cost, convenience, and other features.
Product and Service Features
Bank #1
Bank #2
Credit Union
Savings Accounts
Federal Account Insurance*
Minimum balance requirement on
savings account to waive monthly fee
Interest rate on savings account
Certificates of Deposit (CDs)
Interest rate on 1-year, 3-year, and
5-year certificate of deposit (CD)
Opening minimum balance for CDs
CD penalty for withdrawals made
before maturity date
Checking Accounts
Minimum balance requirement on
checking account to waive monthly
fee
Interest rate on checking account
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Overdraft, NSF, or returned item fee
(for insufficient funds to cover check
amount)
Fees and Services
Returned deposited item fee (for
deposited checks with insufficient
funds)
Cost to use ATMs at another bank or
location
Online banking services offered and
costs
Description of banking programs for
students
Cost of money orders and cashier’s
checks
*FDIC insurance for banks and NCUA insurance for credit union
Which of the three financial institutions has the best deposit account features and
why?
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Activity 1.5
Two Banks and a Credit Union: Lending Edition
Jennifer Kaplan is shopping around for a “new (to her) used” car and needs to get
a car loan to help pay for it. The total cost of the car is $18,000 but she has $4,000
in savings and has a trade-in car worth $2,000. Thus, she needs to borrow $12,000
and wants to take out a loan for 36 months. She uses credit wisely and has an
excellent credit score of 782.
Jennifer decides to “shop around” by comparing the costs of loans at two local
banks and a credit union. Far Away National Bank offers a 36-month car loan
with an interest rate of 5% and the total interest cost over the life of the loan is
$947.40. Hometown Community Bank offers a 36-month car loan with an interest
rate of 4.5% and the total interest cost over the life of the loan is $850.56. Friendly
Federal Credit Union offers a 4%, 36-month car loan to its members and the total
interest cost over the life of the loan is $754.44.
Fill in the chart below to determine the best loan for Jennifer. The total cost of the
loan is the principal ($12,000) plus the finance charge. The monthly payment, for
the purpose of this activity, is the total cost of the loan divided by the number of
months.
Lender
APR
Finance
Charge
Total Cost
of Loan
Monthly
Payment
Far Away
National Bank
Hometown
Community Bank
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Friendly Federal
Credit Union
Questions:
A. Which car loan is the best deal?
B. Which car loan is the worst deal?
C. Why did the loan that provided the best terms do so?
D. How much did Jennifer save by taking the best deal instead of the worst deal?
E. How could Jennifer have saved even more money on her car purchase?
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F. W
here can Jennifer find information about the monthly cost of car loan
payments?
G. What are the pros and cons of using banks and credit unions?
H. What are the take-away messages from this activity?
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Activity 1.6
A Conversation About Co-ops
Brittany, Carlos, Matthew, and Bella are talking about cooperatives. Read their
conversation as it is acted out in front of the class. Then answer the questions that
follow.
Brittany: Hey, Carlos. What’s in that big bag that you’re carrying?
Carlos: It’s food from the food co-op that I’m bring home for my mom. Our
family belongs to a food co-op that buys food in bulk and sells it in smaller
quantities to its members.
Matthew: What’s a food co-op? Is it like a supermarket?
Carlos: Not exactly. Supermarkets are owned by big companies. Food co-ops, like
all co-ops, are owned and operated by their members. The word co-op is short for
cooperative.
Bella: Are there other types of co-ops besides food co-ops?
Carlos: Oh yeah. There are lots of different kinds of co-ops. We covered this in
my business education class a few weeks ago. There are co-ops for electricity and
telephone service and child care. Even for housing. A lot of people in big cities
like New York City live in housing units that are part of co-ops. Some housing
cooperatives for seniors are also found in rural areas.
Bella: Yes, I remember that business ed class. Mr. Murray also talked about
financial companies that are organized as cooperatives. I remember he talked
about insurance companies and banks and said that they have the word “mutual” in
their name. This indicated that they are owned and operated by the people who do
business with them.
Brittany: Yes, I remember that too. He also told us about credit unions and said
that they were another type of cooperative. My Mom belongs to a credit union
where she works.
Matthew: So what exactly is a credit union?
Brittany: The way my Mom explained it, it’s like a bank. They offer saving
and checking accounts and other financial products like car loans and CDs. The
difference between banks and credit unions is that banks are owned by their
shareholders and want to earn a profit. Credit unions are owned by their members
and just need to cover their operating costs. Credit unions often have better loan
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terms and pay higher interest on savings. My Mom likes her credit union so much
that she opened a savings account for me there.
Carlos: Well, moneybags, I guess the next time we go out for ice cream or
something, you can treat. Right now, I’ve got to get this food home for my Mom.
See you guys later.
Questions:
In small groups, discuss the following questions. Choose a representative to take
notes and report the results of your discussion to the class.
A. What are the advantages and disadvantages of belonging to a food co-op?
B. What are some reasons why people choose to belong to food co-ops?
C. What are the advantages and disadvantages of credit unions?
D. What are some reasons why people choose to belong to credit unions?
E. Do cooperatives always save people money?
F. Does anyone in your family belong to any type of cooperative?
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Activity 1.7
Co-ops in the News
Form groups of three of four students. Go online and find a news article about
a particular consumer co-op. Then visit the Web site of the cooperative that you
selected to learn about.
Choose a group spokesperson. The spokesperson will provide a 2 to 3 minute
summary about the cooperative that the group selected including its name, why
it is in the news, and information that you are able to find out about it such as
its location and service area, industry sector, products and services, number of
members, membership requirements, and other notable information.
Name of Cooperative
Why it is in the News
Location and Service Area
Industry Sector (e.g., financial services, health care, telecommunications)
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Products and Services
Number of Members
Membership Requirements
Other Notable Information
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NOTES
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NOTES
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