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Your Discretionary Income and Student Loans: How One Impacts the Other

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If you’re struggling to keep up with federal student loan payments on your current salary, one option is to sign up for an income-driven repayment (IDR) plan. An IDR plan limits your monthly student loan bill to a certain percentage of your income. The money you have left over after paying for necessary expenses — your discretionary income — can help determine what your new monthly student loan payment will be.

Here’s what you need to know about discretionary income and how it impacts the amount you’ll pay towards your student loans each month.

What is discretionary income?

Discretionary income is the money you have left over from your post-tax income after paying for necessary expenses like rent, utilities and food. It’s what you use to buy nonessentials (also known as discretionary expenses) throughout the month.

How to calculate discretionary income in your budget
For example, let’s say you bring home $3,000 a month after taxes. Your rent and utilities are $1,000, and you spend $400 a month on groceries and $100 per month for car insurance. That means you have $1,500 of essential expenses and $1,500 in discretionary income, which you can put toward discretionary expenses.

If you’re short on cash or lose your job, the first thing you’ll do is reduce your discretionary spending. While you can’t eliminate rent payments, you have more control over your discretionary spending. You might go on a shopping ban to cut down on Target or Starbucks purchases or shop for cheaper alternatives instead.

One important thing to keep in mind is that some people use credit cards or lines of credit to finance vacations, high-end clothing or regular shopping sprees. This approach doesn’t count as spending discretionary income; using a credit card to pay for items and not paying off the balance means spending money you don’t have.

What is discretionary income for student loans?

When it comes to federal student loans and IDR plans, discretionary income works a little differently. Rather than looking at your individual expenses, the Department of Education considers your discretionary income to be your gross after-tax annual income minus 150% of the poverty guidelines for your family size and state. After-tax income is generally referred to as adjusted gross income: That’s your or your household’s income minus certain deductions from income as reported on a federal income tax return.

Each plan differs slightly, but for most IDR plans, your loan servicer will set your discretionary income as the difference between your annual income and 150% of the poverty guidelines.

150% of the Poverty Guideline
Household Size 150% of Guideline
1 $18,735
2 $25,365
3 $31,995
4 $38,625
5 $45,255
6 $51,885
7 $58,515
8 $65,145
*150% of the poverty guidelines as of 2021 for the 48 contiguous states and the District of Columbia. Alaska and Hawaii have separate guidelines.

How do you calculate discretionary income for student loans?

IDR plans were created by the federal government in order to help make student loan payments affordable, regardless of the amount you owe. They make payments affordable by not expecting you to make loan payments from any of the money from your total salary up to 150% of the poverty guidelines. That portion of your income is considered to be essential and non-discretionary. To assist with affordability, IDR programs require 10% to 20% of only your discretionary income as payment.

How to calculate discretionary income for student loans

For example, if you’re single, live in California and have an annual income of $30,000, you would subtract 150% of the poverty guideline for a one-person household: $19,320.

In mathematical form, that looks like: Salary – (Federal poverty guideline for your state & family size x 1.5)

Your remaining income — $10,680 — is considered your discretionary income. Split up over twelve months, that means you have $890 a month for non-essential spending.

If math isn’t your strong point, don’t panic. You don’t have to do these calculations on your own — when you apply for an IDR plan, the government will ask for information about your income and do the calculations for you. Still, having an understanding of how discretionary income works and how to calculate it can help you estimate your new payments.

You can also calculate your potential payments before applying for an IDR plan using the Department of Education’s Loan Simulator.

How does discretionary income affect student loan payments?

If you have several hundred dollars in discretionary income, that doesn’t mean all of your extra money will go toward your student loans. Instead, the government caps your payments at a percentage of your discretionary income.

For IDR plans, you’ll pay between 10% and 20% of your discretionary income toward your loans each month. If you don’t have much extra money, your payment could be much lower — and you may even qualify for a $0 monthly payment.

Using the information from the example above, say that you signed up for Revised Pay As You Earn (REPAYE) and had $890 a month in discretionary income. REPAYE caps your payments at 10% of your discretionary income, so your monthly payment wouldn’t exceed $89. If your loans are large, that can mean big savings because of the huge reduction in monthly payments.

However, while IDR plans can free up more cash each month, there are some downsides. Your repayment term can be extended to as long as 25 years, so you could pay much more in interest over the life of your loan. Make sure you understand how much you’ll spend on an IDR plan before signing up. Estimate your potential payments on each IDR plan using our student loan calculators.

How often does your discretionary income change for student loans?

Your discretionary income is a fluid number, and it could change when in a variety of circumstances.

In the specific context of student loan repayment, your official discretionary income is adjusted at least annually. That’s because the Department of Education calls for borrowers to recertify and renew income-driven repayment plans each year.

Certain life events could cause your discretionary income — and, therefore, your monthly student loan payments — to go up or down.

Event Student loan payment
Get a raise at work Increase
Lose your job or experience pay cut Decrease
Add a member to your family Decrease
Move outside the contiguous U.S. (to Alaska, Hawaii or abroad) Increase or decrease, depending on location

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