How to calculate your discretionary income for income-driven repayment plans

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Discretionary income is the amount of money you have left over after paying for necessary expenses, and it’s used to calculate student loan payments on several federal repayment plans. Income-driven repayment plans use your discretionary income to help determine your monthly student loan payment, so it’s important to know exactly what your discretionary income is.

What is discretionary income?

In a basic sense, discretionary income is the extra income you have after paying for basic necessities, or income that you can use for nonessential expenses. The federal government uses your discretionary income, calculated using your state’s federal poverty guidelines, to decide how much you can afford to pay each month toward your student loans when you sign up for income-driven repayment.

What discretionary income is used for

Income-driven repayment (IDR) plans are one option for federal student loan borrowers. With these plans, your payments will be adjusted based on how much you actually earn, and you’ll pay that amount over a period of 20 to 25 years. IDR plans generally calculate your payment as 10 percent or 15 percent of your discretionary income. These plans are designed to lessen the burden on borrowers and ensure that they can make their payments comfortably.

How discretionary income can change

When it comes to determining your payment on an IDR plan, discretionary income is not a one-time calculation. You have to resubmit your income, family size and state of residence information every year. Federal poverty guidelines are also updated every year, so it’s very likely that your monthly payment will change.

Borrowers who live in Hawaii and Alaska have higher federal poverty guidelines than the rest of the United States. If you move from California to Hawaii, you may see a lower monthly payment.

If you receive a large salary increase, then your payments may also increase. On the other hand, if you lose your job or downgrade to working part time, your payments will likely decrease. In fact, people who are unemployed generally have a $0 monthly payment. These payments will still count toward the necessary requirement for income-driven loan forgiveness.

Family size is also important when calculating discretionary income. The federal poverty guidelines increase as the family size increases. For example, the federal poverty guidelines for a single person in most states is $12,880, but it’s $17,420 for a family of two.

How to calculate your discretionary income

When calculating discretionary income for an IDR plan, the first step is to figure out what your income is and whether you should include your spouse’s income. This depends on the type of repayment plan you choose. For most IDRs plans, your spouse’s income will be included only if you file taxes jointly. However, your spouse’s income will be included in all cases with the Revised Pay As You Earn (REPAYE) Plan.

Once you know your personal income, look up the federal poverty guidelines for your state and family size. Multiply the federal poverty amount by 150 percent (or 100 percent if you’re pursuing the Income-Contingent Repayment Plan) and then subtract your income. That is your discretionary income.

Income-driven repayment plan example

Let’s say you live in New York and earn $40,000. The federal poverty guideline for New York is $12,880; multiplying that number by 150 percent gives you $19,320. By subtracting $19,320 from $40,000, you’ll get a discretionary income of $20,680.

Each of the income-driven repayment plans use a different formula to calculate your monthly payment, typically either 10 or 15 percent of your discretionary income. If you signed up for Pay As You Earn (PAYE), which charges 10 percent of your discretionary income, you would pay $2,068 per year toward your student loans, or roughly $172 per month.

You can also use the U.S. Department of Education’s loan simulator. The simulator will assess your personal information and calculate what your monthly payments would be under all of the payment plans you qualify for. From there, you can decide if you want to change your repayment plan or stick with the standard plan.

The bottom line

As your income changes, so will your discretionary income. Family size also has a huge impact, so if you get married, get divorced or have a baby, you could find yourself with an entirely different discretionary income. However, if you don’t earn much, it may be smart to sign up for an income-driven repayment plan, which could bring your student loan payments down to $0.

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Written by
Zina Kumok
Contributing writer
Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference.
Edited by
Student loans editor