What Is Discretionary Income for Student Loan Repayment?
Understand how discretionary income is defined, calculated, and used to determine your federal student loan payments.
Managing federal student loan debt often presents a complex financial challenge. While standard repayment plans offer fixed monthly payments, flexible repayment options adjust based on financial capacity, aiming to make payments manageable by considering income and essential living expenses. A central component determining affordability within these plans involves a specific financial metric known as discretionary income.
Understanding Discretionary Income
Discretionary income is not simply the money remaining after all personal bills are paid. Instead, it represents a specific calculation mandated by the U.S. Department of Education to determine an affordable student loan payment, ensuring borrowers are not burdened with unaffordable payments. It serves as a foundational element for repayment plans that adjust monthly payments based on a borrower’s financial situation. The formula aims to protect a portion of a borrower’s income for essential living costs, with payments then based on the income beyond that protected amount.
This specialized definition differs from the everyday understanding of discretionary income, which typically refers to money left over for non-essential spending like entertainment or travel. It uses a standardized approach that considers adjusted gross income, family size, and federal poverty guidelines to arrive at a consistent figure. This method ensures fairness and consistency for borrowers using these repayment options.
Calculating Discretionary Income
The calculation of discretionary income begins with a borrower’s Adjusted Gross Income (AGI). AGI represents your total gross income for the year, reduced by specific tax deductions, and can be found on IRS Form 1040. Common deductions that lower AGI include contributions to traditional Individual Retirement Arrangements (IRAs), student loan interest payments, and certain health savings account contributions. A lower AGI directly translates to a lower calculated discretionary income, leading to reduced student loan payments.
From the AGI, a protected amount based on the federal poverty line is subtracted. Federal poverty guidelines are established annually by the U.S. Department of Health and Human Services and vary by family size. For most income-driven repayment plans, this protected amount is generally 150% of the federal poverty guideline for your family size. However, for the Income-Contingent Repayment (ICR) Plan, the protected amount is 100% of the federal poverty guideline.
Family size plays a role in this calculation, as the federal poverty line increases with each additional family member. Family size typically includes the borrower, their spouse (depending on tax filing status and the plan), and any children who receive more than half their support from the borrower. Other individuals may also be included if they live with the borrower and receive more than half of their support.
For example, a single borrower with an AGI of $50,000 and a federal poverty guideline of $14,580 would have a protected amount of $21,870 (150%). Discretionary income would be $50,000 minus $21,870, resulting in $28,130. This figure determines the monthly payment under an income-driven plan. Borrowers must recertify their income and family size annually, so payments can change annually.
How Discretionary Income Affects Repayment Plans
The calculated discretionary income directly influences the monthly payment amount under various federal income-driven repayment (IDR) plans. These plans base payments on a percentage of a borrower’s income rather than a fixed amount. Several IDR plans are available, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and Saving on a Valuable Education (SAVE, formerly REPAYE).
Each IDR plan uses a percentage of a borrower’s discretionary income to determine the monthly payment. For example, under the PAYE plan, monthly payments are 10% of your discretionary income. For IBR, payments are generally 10% or 15% of discretionary income, depending on when loans were taken out. The ICR plan sets payments at 20% of discretionary income. The SAVE plan bases payments on 5% to 10% of discretionary income, depending on whether the loans are for undergraduate or graduate study.
If the calculation results in a discretionary income of zero or a negative amount, the monthly payment under most income-driven plans is $0. Borrowers with very low incomes relative to their family size are not required to make payments while remaining in good standing. This $0 payment still counts towards the required period for potential loan forgiveness under IDR plans.
The Repayment Assistance Plan (RAP) is slated to replace IDR plans for new borrowers after July 1, 2026. Unlike current IDR plans, RAP will calculate payments based on adjusted gross income (AGI) directly, rather than a shielded portion of income, and will have a minimum monthly payment of $10. This means the concept of “discretionary income” will not apply to RAP.