What Is Discretionary Income for Student Loans?

Discretionary income is the portion of your earnings used to calculate monthly payments for certain federal student loan repayment plans. It’s not the same as disposable income — a similar, though unrelated term.

With the student loan changes introduced in the “One, Big, Beautiful Bill Act” in 2025, the use of income-driven repayment plans — and thus the discretionary income calculation — will be reduced starting in July 2026. Here’s what you need to know.

Current student loan refinance rates

What is discretionary income?

Discretionary income is the difference between your annual adjusted gross income (AGI) and a specific percentage of the federal poverty line for your household size and location.

The Department of Education uses it to determine your monthly payments for federal income-driven repayment (IDR) plans, including Income-Based Repayment (IBR) and Pay as You Earn (PAYE). 

How is discretionary income calculated for student loans?

“Discretionary income is based on a simple formula of adjusted gross income minus some percentage of the federal poverty level for a given family size,” says Jack Wang, a financial aid adviser at Innovative Advisory Group and host of the Smart College Buyer Podcast. “The difference is discretionary income.”

To determine your discretionary income, start with the poverty level for your household size, which can be found through the Department of Health and Human Services, and multiply it by the percentage dictated by your student loan repayment plan:

• Income-Contingent Repayment (ICR) Plan: 100%  
• Income-Based Repayment (IBR) Plan: 150% 
• Saving on a Valuable Education (SAVE) Plan: 225% 
• Pay As You Earn (PAYE) Plan: 150%

The amount you get is what the federal government considers “a protected portion of your income,” says Stacey MacPhetres, senior director of education finance at EdAssist by Bright Horizons.

From there, subtract that protected amount from your AGI. The result is your discretionary income for federal student loans. 

Which repayment plans use discretionary income?

There are currently four income-driven repayment plans that use the discretionary income calculation for student loan borrowers:

• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)
• Saving on a Valuable Education (SAVE)
• Pay As You Earn plans (PAYE)

Starting in July 2026, though, these programs will no longer be available to new borrowers, and most will begin to be phased out for existing borrowers. A new income-driven plan, the Repayment Assistance Plan (RAP), will be the only income-driven option for new borrowers, and IBR is the only legacy income-driven plan not being phased out for those already in it before July 1, 2028.

However, RAP will not use the discretionary income calculation.

“RAP calculates payments based on AGI and the number of dependents,” says MacPhetres. “There is no poverty line protection amount.” 

How discretionary income affects monthly payments

Discretionary income has a direct impact on how much you pay under certain student loan repayment plans. For example, with the PAYE Plan, you’d pay 10% of your discretionary income. If your discretionary income was $50,000, for example, you could expect to pay $5,000 annually in student loan payments — or about $417 per month.

Here’s a look at how payment percentages vary by plan type:

While the new RAP income-driven plan won’t calculate payments this way, it “may result in higher monthly payments for some borrowers compared with SAVE or IBR, because RAP doesn’t exclude 150% or 225% of the poverty guideline from income,” says MacPhetres.

Discretionary income vs disposable income

You might have heard the term “disposable income” before, and while it sounds similar to discretionary income, the two aren’t the same. 

Unlike discretionary income, disposable income doesn’t factor into federal student loan calculations. It’s also typically used as a more general budgeting term.

“Disposable income is generally after any after-tax deductions that the person may have, such as a direct deposit into savings, child support, or wage garnishment,” says Wang. “It’s usually also after any loan, mortgage, or rent payments, too.”

Disposable income also doesn’t factor in any localized elements (such as the state poverty level, as discretionary income does). 

“It does not take into account the difference in cost of living based on geography,” says Wang. “It is the same measure for the contiguous 48 states. Only Alaska and Hawaii are treated differently.”

How to lower your discretionary income

Since your discretionary income factors into your monthly student loan payments on certain repayment plans, the less discretionary income you have, the less you’ll have to pay toward your student loans each month. And while no one wants to take a pay cut just to have lower student loan payments, there are strategies you can employ if you want to pay less. 

“Discretionary income is based on two factors — adjusted gross income and family size,” explains Wang. “Anything that a person can do to lower AGI can help.”

This might include:

• Increasing your retirement contributions
• Taking additional tax deductions
• Putting more into a health savings account
• Making catch-up retirement contributions if you’re over age 50

And if you do end up taking a pay cut, make sure to recertify your income as soon as possible.

“Generally, a borrower would update their AGI — and therefore, their discretionary income — each year,” says Wang. “However, a borrower can update more frequently if there is a job change or job loss, or if the borrower or spouse is pregnant. Even though the baby may not yet be born, that counts as an increase in family size.”