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What Is Discretionary Income?

Discretionary income is used to calculate your monthly federal student loan payments on an income-driven repayment plan.

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By Christy Bieber

Written by

Christy Bieber

Freelance writer, Credible

Christy Bieber has spent more than 16 years in personal finance and is an expert on student loans, debt, social security, and mortgages. Her work has been published by The Motley Fool, CBS News, and USA Today.

Edited by Renee Fleck

Written by

Renee Fleck

Editor, Credible

Renee Fleck is a student loans editor with over five years of experience. Her work has been featured in Fast Company, Morning Brew, and Sidebar.io, among other online publications. She is fluent in Spanish and French and enjoys traveling to new places.

Updated October 4, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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Credible takeaways

  • Discretionary income is the amount of money left after covering essential expenses, and it's used to calculate student loan payments under income-driven repayment plans.
  • Your monthly payment on an income-driven plan is based on a percentage of your discretionary income, which can fluctuate as your income changes.
  • Understanding discretionary income is important for budgeting and achieving financial goals like paying off debt and building savings.

Discretionary income is the amount of money left after covering your essential living expenses and taxes. If you're repaying student loans under an income-driven repayment plan, discretionary income plays a crucial role in determining your monthly payment. However, the formula used to calculate discretionary income for federal student loans isn't as simple as subtracting your expenses.

This guide will break down how discretionary income is calculated for student loan payments and how it influences what you'll owe each month.

What is discretionary income?

Discretionary income is the amount of money left over after you've paid taxes and covered necessary costs like housing, food, and utilities. When it comes to federal student loans, discretionary income is used to calculate your monthly loan payments on an income-driven repayment (IDR) plan.

Discretionary income is determined by comparing your annual income to the federal poverty level. The lower your discretionary income, the smaller your monthly payment under an IDR plan. The exact formula for calculating this amount varies depending on the specific repayment plan you choose.

Discretionary vs. disposable income

Disposable income is the money you have left after required deductions like taxes and health insurance are taken from your paycheck. Discretionary income goes a step further. It's what's left after you've paid for both those deductions and your essential expenses, such as housing and groceries.

How to calculate discretionary income

To calculate your discretionary income for federal student loan payments, you can follow these steps:

  1. Determine your annual income: This is your total yearly earnings before taxes and other deductions.
  2. Check the federal poverty guidelines: Refer to the federal poverty guidelines and find out the poverty line for a family of your size. The U.S. Department of Health and Human Services publishes the poverty guidelines.
  3. Calculate the difference: Calculate the difference between your annual income and a specific percentage of the federal poverty guideline. The percentage used varies depending on the income-driven repayment plan you're enrolled in.

The table below shows the percentage of the federal poverty line used to calculate discretionary income for each income-driven repayment plan.

Income-driven repayment plan
Discretionary income (%)
Saving on a Valuable Education (SAVE) Plan
225%
Pay As You Earn (PAYE) Plan
150%
Income-Based Repayment (IBR) Plan
150%
Income-Contingent Repayment (ICR) Plan
100%

Example of discretionary income calculation

Let's say you're a single-person household earning $45,000 per year and you're enrolled in the IBR Plan. Here's what that would look like:

  • Your annual income is $45,000.
  • The federal poverty guideline for a one-person household in 2024 is $15,060 for the 48 contiguous U.S. states and Washington, D.C.
  • For the IBR Plan, you subtract 150% of the federal poverty line from your income. In this case, 150% of $15,060 is $22,590.

Now, subtract $22,590 from your income of $45,000. Your discretionary income would be $22,410. Under the IBR Plan, new borrowers pay 10% of their discretionary income, so you'd divide $2,241 by 12 to get a monthly payment of about $187 per month.

How discretionary income impacts student loan payments

If you're on an income-driven repayment plan, your discretionary income plays a key role in determining your monthly payment. You'll pay a percentage of this income toward your student loans, with the specific percentage depending on the plan you're enrolled in.

The table below outlines the percentage of discretionary income you'll be required to pay, along with the repayment period for each plan. The lower your discretionary income, the smaller your monthly payment will be.

IDR plan
Discretionary income owed
Repayment period
SAVE Plan
5% for undergraduate-only borrowers; weighted average of between 5% and 10% for borrowers with graduate debt
20 years if you have only undergraduate loans; 25 years if you have any graduate or professional loans
PAYE Plan
10%
20 years
IBR Plan (borrowed after July 1, 2014)
10%
20 years
IBR Plan (borrowed before July 1, 2014)
15%
25 years
ICR Plan
20%
25 years

Why discretionary income matters in personal finance

Discretionary income isn't just important for student loan payments - it plays a key role in your overall financial health. The more discretionary income you have, the easier it becomes to pay off debt, build savings, and invest in your future. This is money you can spend or save as you choose, without being tied to essential expenses.

Once you calculate the discretionary income, you can start making a budget for your discretionary funds to make the most of the money.

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FAQ

How does discretionary income affect my student loan payments?

Discretionary income directly impacts your student loan payments if you're on an income-driven repayment plan. Depending on the plan, your monthly payment will be between 5% and 20% of your discretionary income.

Can my discretionary income change over time?

Yes, your discretionary income can change over time, which is why you need to recertify your income annually for income-driven repayment plans. As your income changes, your payments will adjust accordingly.

What's the difference between discretionary and disposable income?

Disposable income is money left after taxes and other mandatory deductions. Discretionary income is money left after covering both mandatory deductions and all other essential living costs.

How do I calculate my discretionary income?

To calculate discretionary income for federal student loans, compare your annual income to a percentage of the federal poverty line, which varies depending on the income-driven repayment plan you're enrolled in.

Why is understanding discretionary income important for budgeting?

Understanding discretionary income helps you budget effectively by showing how much you have left after covering essential expenses. This allows you to allocate funds wisely for savings, debt repayment, or other purchases that enhance your financial well-being.

Meet the expert:
Christy Bieber

Christy Bieber has spent more than 16 years in personal finance and is an expert on student loans, debt, social security, and mortgages. Her work has been published by The Motley Fool, CBS News, and USA Today.