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What Behavioral Economics Can Teach Us About Financial Aid Packages
Updated: Jul 13
Families aren't reading your financial aid package the way you wrote it. Here's what's actually happening and how to fix it.
In 1979, psychologists Daniel Kahneman and Amos Tversky published research that would eventually win a Nobel Prize and permanently change how we understand human decision-making.
Their finding, at its core, was this: losses hurt about twice as much as equivalent gains feel good.
Basically, losing $100 is not the same emotional experience as finding $100. The loss dominates. It is felt more intensely, remembered more vividly and weighs more heavily on decisions. This principle, called loss aversion, is one of the most robust findings in behavioral economics. And it shows up, quietly and powerfully, every time a family opens a financial aid package.
I watched this happen up close. I used to work at an institution with a premier scholarship program: a highly competitive award that students would travel from across the state to interview for, in front of a panel, for a significant scholarship. We would invite hundreds of students. In some years, more than 200 applicants would come to campus to compete for ten full-tuition scholarships.
And I can tell you: there was not a single parent in that room who did not believe their student was going to be one of the ten recipients. Not one.
Every family had already decided, somewhere in their minds, that this was theirs. And when it didn't happen, what we received was not gratitude for the invitation to participate in an exceptional program. Nor the extra money they walked away with — not a full ride, but more money than when they start.
What we received was disappointment. Even grief, in some cases. Real, raw grief. That's because the brain does not process a missed expectation as a neutral outcome. It processes it as a loss.
What's Happening in the Family's Brain
Here is what the institution intended when a family opens a standard financial aid package:
Look how much we're giving you.
Here is what the family experiences:
They scan the page. They find the total cost. They subtract the aid. They land on the gap, and that number moves into the house and doesn’t leave.
The grants disappear. The scholarships fade into the background. Loss aversion has taken over. The gap becomes the only number their brain can see.
The Specific Ways Our Financial Aid Packages Work Against Families
We lead with the good news instead of the real number.
When people know there’s a gap coming, the anticipation of finding it creates its own anxiety. They’re scanning for the bad news.
Then we make them calculate it themselves.
That matters.
When families have to do the math, discovering the gap feels like something they uncovered despite us, not something we shared honestly. The calculation becomes part of the emotional experience.
We don't translate line items into plain language. 'Federal Work-Study: $2,500' means almost nothing to a first-generation family who has never encountered this term. Is it a grant? A loan? A job? Money they automatically receive? Money they have to earn?
One sentence of explanation removes an entire category of confusion.
(P.S. If you’re one of those institutions that includes Parent PLUS loans or Work-Study as if they’re gift aid… we should probably talk. 😤)
We bury information they need to make informed decisions.
If a merit scholarship requires a certain GPA to renew, that shouldn’t live in a footnote or a separate webpage. Families deserve to understand the full commitment before they enroll.
If a student loses that scholarship sophomore year because no one clearly explained the renewal requirements, the financial shock can be significant enough to derail their education.
Transparency is a retention strategy as much as it is a communication strategy.
And while we’re at it…
Are you telling families which parts of the bill are flexible? Can changing residence halls lower costs? Choosing a different meal plan? Living at home after the first year?
Those conversations shouldn’t begin only after a family thinks they can’t afford you.
We present a large, abstract number with no context.
A $20,000 gap is difficult for the human brain to evaluate. But $1,667 per month over a 12-month payment plan?
That’s a number a family can hold up against its monthly budget and actually reason about.
Behavioral economics tells us that people make decisions using reference points, not numbers in isolation. So give families reference points that belong in the same mental category.
Instead of comparing college costs to pizzas, coffee or takeout, compare them to financial decisions families already make.
For example:
“That’s about the cost of a typical car payment.”
“Spread over 12 months, that’s roughly what many families pay for child care each month.”
“An extra $25 per day toward your payment plan reduces your balance by more than $9,000 over the year.”
Those comparisons help families benchmark the cost against expenses they already understand. They also avoid suggesting that a significant college balance can be solved by simply cutting out a few small purchases.
Show what the balance looks like through a payment plan. Estimate what locking in tuition today could save over four years. Explain what a student’s part-time earnings could realistically contribute over an academic year.
Families may also need help identifying which current expenses will decrease or shift when their student leaves for college.
They are already paying for food, utilities, transportation, activities and other day-to-day costs. Some of those expenses may continue, but others may be reallocated toward housing, meals, tuition or supplies.
Help families consider the net change to their household budget, not just the new charge.
The goal is not to make college seem less expensive. It is to help families understand what the cost will actually mean for them.
Ultimately, the financial aid package shouldn’t assign homework.
It should answer questions.
What a Loss-Aversion-Informed Package Looks Like
The dollar amounts don’t change. The cost of attendance doesn’t change. What changes is the experience.
You change the order of information.
You translate every unfamiliar term.
You clearly explain scholarship renewal requirements.
You convert large, abstract numbers into amounts families can actually evaluate.
And instead of ending with the name of an office, you end with the name of a person.
Name the gap first and clearly. Translate every line item. State renewal requirements in the package itself, not a footnote. Provide payment plan examples or other ways to put the remaining balance into perspective. Then make it incredibly easy to start a conversation.
Name a direct contact or a way to schedule a conversation. Replace 'contact the Office of Financial Aid' with a named counselor, a phone number, a text option, and an explicit invitation to use them.
When the Package Becomes a Family Conversation
The financial aid package is not the end of the experience.
It is the beginning of a conversation.
When a family calls with questions, counselors should not have to reconstruct the student’s financial story from scratch. They need access to the same information the family is using to make the decision, including the student’s SAI, full award package, remaining balance, loan eligibility, payment options and any previous conversations already documented.
If counselors are expected to reduce confusion, they need enough context to do it.
This is still behavioral economics.
Every extra system they have to open, every number they have to recalculate and every piece of information they cannot see adds friction to the conversation. And that friction does not stay behind the scenes. Families feel it.
Counselors also need to know how to begin.
“I’m really glad you called. Let’s look at this together” creates a very different experience than immediately explaining policies, deadlines or loan limits.
Before they explain the package, teach them to ask:
“Can you tell me what is worrying you most?”
The answer may be the remaining balance. It may be debt. It may be confusion about whether the family is allowed to ask for more aid. It may be a competing offer from another institution.
Those are not the same conversation.
The best financial aid conversations do not begin with an explanation.
They begin with listening.
Other Behavioral Economics Principles Worth Exploring
Loss aversion is just one way behavioral economics can improve the enrollment experience. Here are a few others worth considering as you review your financial aid package and enrollment communications.
Choice architecture
The way information is organized influences the decisions people make.
Instead of: A package that lists grants, loans, work-study and payment options in no particular order.
Try: Organizing the package as “Here’s what you’ve received. Here’s what you’ll likely pay. Here’s how families typically cover the remaining balance. Here’s your next step.”
Choice overload
Too many options often lead to no decision at all.
Instead of: Listing 12 financing options with equal emphasis.
Try: Highlighting the three most common paths families take, while making additional options available if needed.
Defaults
People naturally follow the path that’s already laid out for them.
Instead of: “Contact the Financial Aid Office if you have questions.”
Try: “Your next step is to schedule a 15-minute financial aid review with your counselor before April 15.”
Reference points
People understand numbers by comparing them to something familiar.
Instead of: “Your remaining balance is $18,600.”
Try: “That works out to about $1,550 per month on our payment plan, which is similar to what many families budget for child care or a vehicle payment.”
Cognitive fluency
People are more likely to understand and act on information that is easy to process.
Instead of: Presenting an award package that requires families to add, subtract and build multiple financial scenarios on their own.
Try: Do the math for them. Show the remaining balance if the family declines all loans. Then show the remaining balance if the student accepts the federal Direct Loan. If payment plans are available, show what each scenario looks like as a monthly payment.
Don’t make families open a calculator to understand one of the biggest financial decisions they’ll ever make.
Every calculation you ask a family to perform is another chance for them to reach the wrong conclusion.
Progressive disclosure
People absorb information more easily when it’s introduced in the order they need it.
Instead of: Explaining loans, verification, payment plans and scholarship renewal requirements all on the first page.
Try: First explain the award, then the remaining balance, then financing options, then next steps.
Social proof
People often look to others like themselves when making decisions.
Instead of: “Payment plans are available.”
Try: “Many families choose a monthly payment plan to spread costs throughout the year.”
Uncertainty reduction
Uncertainty creates anxiety, even when the outcome is positive.
Instead of: Ending the package with the Financial Aid Office’s generic email address.
Try: “Your counselor is Sarah. Here’s her direct phone number, email and a calendar link to schedule a call. If you’re unsure about anything in your package, she’d love to walk through it with you.”
The Bottom Line
Behavioral economics isn’t about persuading families to spend more than they can afford. It’s about removing unnecessary friction so they can make one of the biggest financial decisions of their lives with confidence instead of confusion.
The gap is always going to feel like a loss. You can’t change that.
But you can change whether families feel equipped to navigate it.
That difference lives in your package. And your package is something you can rewrite.
Sources and Further Reading
The ideas in this article draw from decades of research in behavioral economics, psychology and decision-making, particularly the work of:
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk.
Kahneman, D. (2011). Thinking, Fast and Slow.
Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness.
Thaler, R. H. (2015). Misbehaving: The Making of Behavioral Economics.
Ariely, D. (2008). Predictably Irrational.
This article is not intended to be an exhaustive review of behavioral economics. Rather, it explores how several well-established behavioral principles can be applied to improve the way colleges communicate financial aid.
At Square One Consulting, I help enrollment and marketing teams build communications that meet families where they actually are — emotionally and financially. squareoneky.com/contact
