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

Discretionary income is the extra income you have after paying for basic necessities, like taxes, everyday expenses, and household bills. It’s a key piece of information to help calculate student loan payments on federal income-driven repayment (IDR) plans. IDR plans generally set your monthly payment as 10 percent or 15 percent of this amount, so it’s important to know how to calculate your discretionary income and how it could impact your student loan payment amount.

What is discretionary income?

In a basic sense, discretionary income is the extra income you have after paying for basic necessities, like taxes, everyday expenses and household bills.

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. You’ll make those payments for 20 to 25 years, after which the remaining balance is forgiven.

How to calculate your discretionary income

Learning how to calculate your discretionary income will help you determine what your student loan payment will be on any of the income-driven repayment plans. Here’s how to do it:

1. Look up the federal poverty guidelines for your state and family size.
2. Multiply the federal poverty amount by 150 percent (or 100 percent if you’re pursuing the Income-Contingent Repayment Plan).
3. Subtract your income.

If you’re married, your spouse’s income may also need to be considered, but this depends on your chosen repayment plan. For most IDR plans, your spouse’s income will be included only if you file taxes jointly. However, if you’re applying for the Revised Pay As You Earn (REPAYE) Plan, your spouse’s income will be included in the calculation regardless of filing status.

You can also use the U.S. Department of Education’s loan simulator to see your monthly payments under all of the plans you qualify for. From there, you can decide whether to change your repayment plan or stick with the standard plan.

Example of an income-driven repayment plan

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. You’ll make those payments for 20 to 25 years, after which the remaining balance is forgiven.

Let’s say you live in New York and earn $70,000. Here’s how you would calculate your discretionary income:

1. Find the 2023 federal poverty guideline for New York, which is $14,580.
2. Multiply the $14,580 guideline by 150 percent to get $21,870.
3. Subtract $21,870 from your annual income of $70,000.

In this example, your discretionary income would come to $48,130.

If you signed up for a plan like Pay As You Earn (PAYE), which charges 10 percent of your discretionary income, you would pay $4,813 per year toward your student loans, or roughly $401 per month.

However, keep in mind that all IDR plans use different formulas. For example, the Income-Contingent Repayment Plan defines discretionary income as 100 percent of the federal poverty guideline, meaning your discretionary income in the above scenario would be $26,410. The ICR Plan also typically charges 20 percent of your discretionary income, so you would pay $5,282 per year or roughly $440 monthly.

Under the new Saving on A Valuable Education, which went into effect June 30, 2023, there are new repayment terms for borrowers:

• Borrowers earning less than $32,800 individually, or less than $67,500 for a family of four, would not have to pay any monthly repayment bills.
• Students who borrow less than $12,000 would have their balance forgiven after 10 years.
• Interest won’t build for borrowers who make monthly repayments.

How discretionary income can change

Discretionary income is not a one-time calculation. Under an IDR plan, you have to resubmit your income, family size and state of residence information every year. Several scenarios can cause your discretionary income — and therefore your monthly payment on an IDR plan — to change:

• The poverty guideline changed: Federal poverty guidelines are updated every year, so it’s very likely that your monthly payment will change from one year to the next.
• Your salary changed: If you received a salary increase, your payments will likely reflect this increase. On the other hand, if you lose your job or go from working full time to part time, you’ll likely see a decreased monthly payment. Unemployed people generally have a $0 monthly payment, but this will still count as a qualifying payment toward IDR forgiveness.
• Your family grew or marital status changed: Federal poverty guidelines increase as the family size increases. For example, the 2022 federal poverty guidelines for a single person in most states is $13,590, but it’s $18,310 for a family of two.
• You moved states: The contiguous states have different poverty guidelines than Alaska and Hawaii, so it’s likely that you’ll see your monthly payments increase or decrease after moving. For example, if you move from California to Hawaii, you may see a lower monthly payment since Hawaii has a higher poverty guideline than California.

The bottom line

Discretionary income is the amount of income you have after paying for your necessities. It is also a  primary factor in monthly student loan payments under a federal income-driven repayment plan. Calculating your discretionary income can help you keep up with your monthly IDR payments, especially when situational and financial fluctuations occur.