There is a pretty good chance that you’ve heard of the term, “discretionary income” before. It is a popular term that gets mentioned a lot, especially when it comes to student loans.
The most common reason why discretionary income gets mentioned with student loans is because, if you’re looking to save money on your student loans through the government, or if you’re looking for student loan forgiveness, you have to be aware of what your discretionary income is.
The U.S. Department of Education has a program called income-driven repayment (IDR). This program has four plans that can help student loan borrowers make their payments more affordable if they’re struggling to make ends meet. Income-driven repayment (IDR) will calculate your monthly payment based on your discretionary income.
Read our quick guide on discretionary income and learn what discretionary income is, how it works and how it can impact your student loan payments.
What is Discretionary Income
Discretionary income is the amount of your income that is left over for spending after paying for personal necessities like food, clothing and shelter.
So, think about discretionary income as the money you have left over in your bank account after paying taxes and paying for your personal necessities in life.
If you want to spend money on a vacation, electronics or a luxury item, that will be paid for with your discretionary income. Remember, those purchases are not necessities, so that money spent will be considered discretionary income.
Discretionary Income and Student Loans
As mentioned above, if you’re struggling to make your student loan payments, you may be in luck. The federal government has a program called income-driven repayment (IDR). Within that program are four plans:
- Income-Based Repayment (IBR)
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Contingent Repayment (ICR)
Each of these four plans use your discretionary income to calculate your monthly student loan payment. It’s important to realize that not every plan uses the same percentage of your discretionary income to calculate your monthly student loan payment. The four Income-driven repayment plans are different, so make sure to explore your options and learn how much of your discretionary income they take into consideration.
Discretionary Income and Income-Driven Repayments (IDR)
To take advantage of student loan forgiveness, you will be required to first enroll in an income-driven repayment plan. If you enroll in any of the Income-driven repayment plans you will be required to submit an annual recertification of your income every year.
Take a look at the four IDR plans below and how they come up with your monthly student loan payment. Also, it’s important to remember, the “soonest” you can be eligible for forgiveness on your student loans isn’t until at least 20 years of qualifying payments (240 monthly payments) under one of these plans.
|Plan||Discretionary Income Percentage|
|Income-Based Repayment (IBR)||10% – 15%|
|Revised Pay As You Earn (REPAYE)||10%|
|Pay As You Earn (PAYE)||10%|
|Income-Contingent Repayment (IBR)||20%|
How Do I Calculate My Discretionary Income?
Before you start calculating, make sure you know a few things first:
- Your Adjusted Gross Income (AGI)
- Family Size
- Poverty Guideline For Your State
To calculate your discretionary income, do the following:
Adjusted Gross Income – 150% of the Poverty Guideline for your Family Size
Student Loan Forgiveness and Student Loan Refinancing
If you find that one of the four income-driven repayment plans isn’t for you, another alternative could be refinancing your student loan. Refinancing your student loan can trim your monthly student loan payment and offer you flexibility. Learn more about refinancing your student loan here, or if you’d like, check our student loan refinancing calculator and see how much you can save with a private lender.