How to Calculate Discretionary Income for Student Loans

Understanding how to calculate your discretionary income for student loans is important if you’re exploring federal student loans and their repayment options, such as the income-driven repayment (IDR) plans the federal government offers. We’ll show you how to calculate your discretionary income and learn which repayment plans you may be eligible for.

What is discretionary income for student loans?

Regarding federal student loans, the government considers your discretionary income the amount you make annually minus a percentage of the poverty guideline for your family size.

Discretionary income for student loans is an important detail the government uses to determine whether federal loan borrowers are eligible for any of its IDR plans––and how much their monthly payment would be. 

Relying on discretionary income for student loans helps the government factor in other necessary expenses borrowers and their families have and set up a reasonable repayment plan they can afford with less financial strain. 

How to calculate discretionary income for student loans

To calculate your discretionary income for student loans, first, you’ll need to know the current year’s poverty guidelines from the Department of Health and Human Services and your annual income (line 11 of IRS Form 1040).

This chart lists the poverty guidelines based on family or household size in the U.S. 

Members of household	Poverty guideline (contiguous U.S. / Alaska / Hawaii)
1	$15,060, $18,810 (AK), $17,310 (HI)
2	$20,440, $25,540, $23,500
3	$25,820, $32,270, $29,690
4	$31,200, $39,000, $35,880
5	$36,580, $45,730, $42,070
6	$41,960, $52,460, $48,260
7	$47,340, $59,190, $54,450
8	$52,720, $65,920, $60,640
Each additional person	+$5,380, +$6,730 , +$6,190

If you don’t have your tax return, you can access it by signing in to your online account from the IRS website. If you’re married and file jointly, you must include your and your spouse’s incomes, with a few exceptions.

Another option is your most recent pay stub. You’re looking for your adjusted gross income (AGI), which is your gross income minus before-tax deductions, such as employer-sponsored healthcare premiums, health savings or flexible spending accounts, and retirement contributions. 

Multiply your AGI by the number of pay periods in a year—24 if you’re paid twice a month, 26 if you’re paid every other week—and you’ll get your annual income. 

Our expert’s advice: Avoid these common mistakes

Crystal Rau

CFP®

One mistake is not using the correct number of members of the household. For example, there’s a gray area surrounding whether you include an ex-spouse. When you recertify, you want to use the situation that applies to you at that moment. Keep in mind your spouse’s income is not included in the calculation if you are filing as married filing separately. Begin with the federal calculator tool for a rough idea of your discretionary income and new payments. 

How does your discretionary income affect student loan repayment?

Your discretionary income for student loans will vary depending on the repayment plan you’re enrolled in for your federal loans. Here’s how:

IDR plan	Annual discretionary income
Saving on a Valuable Education (SAVE) plan	Income minus 225% of the poverty guideline
Pay As You Earn (PAYE) plan & Income-Based Repayment (IBR) plan	Income minus 150% of the poverty guideline
Income-Contingent Repayment (ICR) plan	Income minus 100% of the poverty guideline

Use the Federal Student Aid Loan Simulator to get an idea of your monthly payment and learn which IDR plans you may be eligible for. You can learn more about each repayment plan below. We’ve also included examples of how much your monthly payment would be for each plan based on the following:

• Annual income: $80,000
• Poverty guideline for a family of four: $31,200
• Residence: Contiguous U.S.

IDR plan	Monthly payment & terms
SAVE	10% for 20 years (undergrads) or 25 years (graduates & professionals)
PAYE	10% for 20 years
IBR	10% for 20 years (loans disbursed on or after July 1, 2014); 15% for 25 years (loans disbursed before July 1, 2014)
ICR	20% for 25 years or fixed, income-adjusted payment for 12 years

Saving on a Valuable Education plan

How it works

SAVE is an uncapped plan offered to borrowers with any federal loan except Parent PLUS loans. The payment term is 20 years for undergrads and 25 years for graduates and professionals. 

Your monthly payment through SAVE would be 10% of your discretionary income. As an uncapped plan, SAVE has no maximum monthly payment, which could mean a higher payment than you’d pay on the 10-year standard repayment plan.

SAVE example 

• 225% of poverty guideline: $70,200
• Discretionary income: $80,000 – $70,200 = $9,800
• Monthly payment: $9,800 x 10% ÷ 12 = $81.67

Pay As You Earn repayment plan

How it works

PAYE is a capped plan offered to borrowers who received a loan as of October 1, 2007, and a disbursement of a Direct Loan as of October 1, 2011. All federal loans except Parent PLUS loans are eligible for the PAYE plan. 

The payment term is 20 years, and the monthly payment is 10% of your discretionary income but will never be more than you’d pay under the standard 10-year plan.

PAYE example

• 150% of poverty guideline: $46,800
• Discretionary income: $80,000 – $46,800 = $33,200
• Monthly payment: $33,200 x 10% ÷ 12 = $276.67

Income-based repayment plan

How it works

The IBR plan is a capped plan available to borrowers with any federal loan except Parent PLUS loans. Monthly payments are 10% for 20 years for loans disbursed as of July 1, 2014, but 15% for 25 years for prior loans, and won’t be higher than what you’d pay under the standard repayment plan.

We’ve provided all the details on IBR, including a calculator you can use to preview your potential monthly payment with this plan.

IBR example

• 150% of poverty guideline: $70,200
• Discretionary income: $80,000 – $70,200 = $9,800
• Monthly payment: $9,800 x 10% ÷ 12 = $81.67

Income-contingent repayment plan

How it works

ICR is an uncapped plan available to borrowers with any federal loan. However, before becoming eligible for the plan, you must consolidate any loan that isn’t a Direct Subsidized, Unsubsidized, PLUS, or Consolidation Loan. 

Monthly payments are the lesser of 20% of your discretionary income for 25 years or a fixed payment over 12 years. Since there’s no cap on your monthly payment with ICR, you may end up paying more than you would on the standard plan.

ICR example

• 100% of poverty guideline: $31,200
• Discretionary income: $80,000 – $31,200 = $48,800
• Monthly payment: $48,800 x 10% ÷ 12 = $406.67

If you have federal student loans in good standing and want to see if you could lower your monthly payments, consider applying for an IDR plan on the Federal Student Aid website. 

Loans in default aren’t eligible for an IDR plan. But you can use the Fresh Start program to get out of default and apply. Fresh Start ends at the end of September 2024.

If you’re considering applying for federal student loans, you’ll first need to complete the Free Application for Federal Student Aid (FAFSA). Check out our full guide on the FAFSA, where you’ll learn more about the application process and what you’ll need to complete it.

Is discretionary income important for student loans?

Unlike federal student loans, private student loans aren’t typically based on discretionary income. Instead, private lenders often check your credit history and income to determine whether to approve your loan application.

Discretionary income for student loans may not be important to private lenders, but it should be important to you. Before applying for these loans, calculate your discretionary income by subtracting all your monthly expenses from your monthly income after taxes––your net income. 

Traditionally, when it comes to personal finance, your discretionary income often refers to your AGI minus your essential living expenses and other expenses, such as entertainment, trips, and shopping. However, using your net income is likely better because you’re likely working with after-tax dollars. 

Your net income gives you a better idea of how much you have left over every month and helps ensure you don’t overextend yourself with debt payments.

Read More

Best Private Student Loans