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 income-driven repayment (IDR) plans. 

Student loan changes that took effect on July 1, 2026, mean that discretionary income will no longer be used to calculate payments for new borrowers, though it still applies to some older repayment plans.

Here’s what you need to know.

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What is discretionary income?

Discretionary income for federal student loans is calculated as the difference between your annual adjusted gross income (AGI) and a specific percentage of the federal poverty line for your household size and state. It’s not the same as disposable income — a similar, though unrelated term.

The Department of Education uses your discretionary income to determine your monthly payments for federal income-driven repayment (IDR) plans.

Which repayment plans use discretionary income?

Three income-driven repayment plans use the discretionary income calculation for student loan borrowers: 

• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)
• Pay As You Earn plan (PAYE)

As of July 2026, these programs are no longer available to borrowers with new student loans. ICR and PAYE plans will be phased out for existing borrowers by July 1, 2028, but IBR will remain for borrowers who haven’t taken out new loans since July 1, 2026.

For new borrowers, the Repayment Assistance Plan (RAP) is the only income-driven option. RAP doesn’t use the discretionary income calculation and requires every borrower to pay at least $10 per month. 

This income-driven plan “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. “RAP calculates payments based on AGI and the number of dependents. There is no poverty line protection amount.” 

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, find the poverty level amount for your household size through the Department of Health and Human Services, and multiply that number by the percentage dictated by your student loan repayment plan.

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 the protected amount from your AGI. The result is your discretionary income for federal student loans. 

Discretionary income calculation example

Let’s say you’re a single borrower who took out student loans after July 1, 2014, and are enrolled in IBR. You have no dependents and live in one of the 48 contiguous states. Your AGI from your most recent tax return is $45,000. 

Using the 2026 federal poverty guidelines, here’s how your monthly student loan payment is calculated based on your discretionary income:

1. Poverty guideline: $15,960 
    
2. Protected portion of income: $15,960 × 1.5 (150%) = $23,940
    
3. Subtract the protected portion from AGI: $45,000 − $23,940 = $21,060 is your discretionary income.
    
4. Apply your plan's payment percentage: $21,060 × 10% = $2,106 per year.
    
5. Convert to a monthly payment: $2,106 ÷ 12 = $175.50 per month

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, 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.”