Understanding Discretionary Income and Student Loan Repayment Options

Navigating student loan repayment can be a daunting task, especially with various plans and eligibility requirements. Understanding key concepts like discretionary income is crucial for choosing the right repayment strategy and managing your finances effectively. This article will explore the definition of discretionary income, its role in income-driven repayment (IDR) plans for federal student loans, and how it impacts your monthly payments.

What is Discretionary Income?

Discretionary income is the money you have left over after paying for essential expenses. It is the amount of income remaining after covering essential costs such as taxes, everyday expenses, and household bills. Think of discretionary income as the money you would use for optional spending like vacations, gym memberships, spa services, hobbies, eating out and entertainment.

Discretion is defined by Merriam-Webster as individual choice or judgment. So, discretionary income is money that is left over, and you have to decide what to do with it. It is money that is not committed to anything else. It can be used for whatever you like.

Discretionary Income vs. Disposable Income

Discretionary income is not the same as disposable income. Disposable income is the net income money a household or individual has left to invest, save, or spend after income taxes have been deducted from your paycheck. Discretionary income is the amount of money left after paying necessary expenses. You use it to pay for vacations, trips to the movies, date nights, etc. Disposable income is a general personal finance term that simply describes how much income you have left after taxes are paid. Discretionary income is a more specific term that's typically used in the world of federal student loans but is also considered when you're creating a budget. It accounts not just for the money left over after taxes but after you also deduct expenses you can't live without.

Knowing both your disposable and discretionary income can help you budget effectively and accurately.

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Discretionary Income and Student Loans

Discretionary income is particularly important if you opt for an income dependent repayment (IDR) plan. An income dependent repayment plan can come as a real relief if you are struggling to make your monthly payments with a standard repayment plan.

If you choose to be on an income-driven repayment plan for your federal student loans, your payment is based on a percentage of your discretionary income. Your family size is also factored in, since the goal is to ensure you can pay your loans while still having enough income for your family's size.

How to Calculate Discretionary Income for Student Loans

The federal government uses a different calculation for certain types of income-driven repayment plans. So if you have federal student loans, your discretionary income is based on a standardized formula rather than your actual amount.

The formula for discretionary income is really quite simple. According to the federal government, you take your income and subtract out 150% of the “poverty guideline.” In the case of SAVE, that percentage has increased to 225%.

The discretionary income formula is (AGI less 1.5 or 1.0 of family size) divided by 12.

Here’s a breakdown of the steps:

Locate your AGI: AGI is your adjusted gross income, which is your gross income after eligible deductions. It is not your annual income. Your income for these purposes is defined as Adjusted Gross Income (AGI).
Count your family size: Your family size includes any child you provide more than 50% for no matter where they live.
Check the poverty line: The Department of Health and Human Services (HHS) releases a federal poverty guideline annually for the 48 contiguous states and the District of Columbia, Alaska, and Hawaii. The last two states have a higher cost of living, so the HHS generates a different poverty line for those states. The poverty guideline is published by the Department of Health and Human Services (HHS). It depends on where you live and on your family size.
Subtract that amount from your income.
Apply the plan’s percentage.

While borrowers can calculate their discretionary income and monthly payment by hand, they don’t have to. Department of Education’s loan simulator to see your monthly payments under all the plans you qualify for.

Example Calculation

For the first three plans listed above (SAVE, PAYE and IBR), the government calculates discretionary income as the difference between your annual income and 150% of the poverty guideline for your state and family size.

Kate is single. She has no children and lives alone. She lives in California. She’s repaying her loans under the REPAYE Plan. The adjusted gross income on her 2020 federal tax return is $50 thousand. The federal poverty line for a family size of one in California is $12,880. Multiplied by 150%, that amount becomes $19,320. The final step is for Kate to subtract $19,320 from her AGI, $50 thousand. Kate’s adjusted gross income is $31,680. She’s in the REPAYE Plan, which uses 10% of her discretionary income to calculate her monthly payment.

Each of these federal student loan repayment plans uses a different formula to calculate your monthly payment, typically either 10 or 15% of your discretionary income. With an income dependent repayment plan, you pay anywhere between 10% and 20% of your discretionary income towards your loan payment every month. Only your discretionary income is taken into the calculation, which means you will always have money to pay off your essentials regardless of how low your salary may be.

Changes to Discretionary Income

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. Each year, you’ll need to submit the annual recertification to your loan servicer to remain in an IDR plan. The annual recertification asks you to confirm your family size, income, and state of residence when you’re signing the Income-Driven Repayment Plan Request form.

Discretionary income changes as your family size and income increases or decreases, or you move to a different state.

Your salary changed: If you received a salary increase, your payments will likely reflect this increase. Your family grew or your marital status changed: Federal poverty guidelines increase with family size.

Income-Driven Repayment (IDR) Plans

If you’re struggling to pay your bills-including your federal student loan bills-on a salary that might not be enough for your expenses, income-driven repayment (IDR) plans can help. When it comes to federal student loans, choosing how to repay them can make a big difference in your financial life after college. Switching to an income-driven repayment plan (IDR) could make your student loan payments more manageable.

Income-driven repayment (IDR) plans typically base your monthly student loan payment on your discretionary income - the difference between your annual income and a percentage of the poverty guideline for your family size and state of residence.

The Department of Education offers four types of income-driven repayment plans for federal student loans. The official Federal Student Aid repayment site is the source for what’s available for your specific situation. If you’re enrolled in an income-driven plan, you can switch to another one. There’s a single application to fill out whether you’re applying for the first time, changing plans, or recertifying your personal info.

To figure out whether you’re eligible and what an income-driven repayment plan could mean to your monthly payments, you can use the Department of Education’s loan simulator.

Specific IDR Plans

SAVE Plan: For your monthly payment, SAVE considers your income and family size. With SAVE, though, no accrued interest will be added to your loan balance if you make your monthly payment. *Note: The SAVE Plan is being phased out on July 1, 2026.
PAYE Plan: *Note: The PAYE Plan is being phased out by July 1, 2028.

Repayment Assistance Plan (RAP)

Starting in July 2026, the new Repayment Assistance Plan (RAP) will replace much of the current system and base payments on adjusted gross income (AGI) instead. Starting July 1, 2026, RAP will replace most existing IDR plans. Payments may increase, especially at lower income levels, due to the $10 minimum and use of AGI.

Lowering AGI to Reduce Payments

As a general rule, the key to lowering payments and increasing subsidies (under PAYE and IBR, the government will pay your interest for three years) is to lower your AGI. If you're having trouble sorting out exactly what to do in your situation, consider booking an appointment with StudentLoanAdvice.com.

Under an IDR Plan, your monthly payment is based on, among other things, your AGI.

Discretionary Income in Budgeting

Knowing your discretionary income is a basis for creating a budget that guides how much you save and spend, which could help you build financial security and meet your goals. Calculating your monthly discretionary income is important for building a personal budget and focusing on your top financial priorities. Understanding your financial situation starts by calculating how much discretionary income you have each month.

To estimate your take‑home pay, start with your expected annual income, apply a reasonable effective tax rate to approximate your total taxes, and subtract that amount.
This includes rent or mortgage, utilities, transportation, health care, minimum debt payments, and basic living expenses. Unsure if something is essential?

Alternative Options

If you have a number of student loans, or you also have credit card debt, one option is to combine them into a debt consolidation loan. Some borrowers may find it easier to streamline debts into one monthly payment, and it's possible to nab better terms and lower interest rates. It could also free up some discretionary income to put toward other financial goals.

Lenders of private student loans don’t offer borrowers payments based on their income. If you’re struggling to make your payment each month, look into refinancing for a lower interest rate or longer repayment term.

It's important to note, however, that you'll lose important benefits that come with your federal student loans if you refinance them into a private loan, so proceed with caution.

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