How discretionary income determines your student loan costs

This measure of personal income shows how much you can spend on nonessential expenses.

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Elissa SuhSenior Editor & Disability Insurance ExpertElissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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Key takeaways

  • Discretionary income is money leftover after paying for necessary expenses

  • Necessary expenses include taxes, food, and shelter

  • Student loan payments for an income-based repayment (IBR) plan are based on discretionary income

  • You might have lower monthly payments with this type of repayment plan

Discretionary income is the money you have leftover after taking care of any necessary expenses, like food, shelter, and taxes. Discretionary income is what you spend on nonessential things — like going on vacation, seeing a movie, as well as investing or saving.

If you have student loans, discretionary income is also an important figure for determining the monthly payments for an income-based repayment plan.

What qualifies as discretionary income?

Discretionary income is the money you have left over after taking care of any required costs.

Discretionary income is what remains after you pay:

  • Taxes

  • Housing costs, including rent or mortgage payments, utilities

  • Insurance

  • Food

  • Debts

The remaining income can be used however you want. Examples of discretionary income would be money spent on:

Discretionary income vs disposable income

Disposable and discretionary income are two different things. Disposable income is simply your after-tax income. While discretionary income also accounts for taxes, it goes a step further and factors in the other necessary costs. Discretionary income will be less than disposable income.

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Discretionary income = disposable income - necessities

Neither of these types of income necessarily constitute take-home pay, which is the actual amount you receive from your paycheck. It can be the same as disposable income, but it might also include deductions for retirement accounts, insurance, and other workplace benefits.

How to increase your discretionary income

It’s important to have an emergency fund to cover your expenses when something unexpected happens and also to have money saved for retirement. You might have noticed that money for saving and investing comes from your discretionary income.

If you find that you don’t have enough money to spare towards saving and investing, you might need to increase your discretionary income. You can do this by trying to lower the cost of your necessary expenses. For example, you might try to lower your mortgage payments or find a cheaper apartment, or shop around for better homeowners insurance rates. (If you’re looking for the best life insurance rates, Policygenius can help you get free quotes.)

Discretionary income and student loans

If you’re having trouble repaying your federal student loan, you may be able to lower your monthly payment with an income-driven repayment plan (IDR).

Two popular types of IDRs are the income-based repayment plan , which sets your payment amount to 10% to 15% of your discretionary income, and the income-contingent plan, which sets your payment to 20% of your discretionary income. If your income is low enough, then you potentially may pay as little $0.

How to qualify for income-driven repayment plans

The Department of Education sets their own definition for discretionary income using a formula based on the federal poverty guidelines. Discretionary income is calculated as either 150% or 100% of the federal poverty guideline subtracted from your income, for an income-based or income-contingent repayment plan respectively.

We’ll go through an example for the income-based repayment plan with this formula:

Discretionary income = adjusted gross income - 150% of the poverty guideline

The poverty guidelines change depending on the size of your family household. The income is your adjusted gross income, which you can find on your tax return. It is your gross income after you account for any possible tax deductions, like retirement plan contributions or student loan interest payments.

As of 2020, the federal poverty guidelines are:

Household size

48 contiguous states + D.C.



































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As an example, let’s say your adjusted gross income (AGI) is $40,000 and you are the only person in your household in California:

  • Formula = $40,000 - (150% of $12,760)

  • Formula = $40,000 - $19,140

  • Annual discretionary income = $20,860

  • Monthly discretionary income = $1,738

With an income-based repayment plan, your new loan payments will range from 10% to 15% of your discretionary income, which is $174 to $261 a month in this example.

Other student loan repayment options

Your loan servicer may not offer an income-based repayment plan if you have a private student loan. But if you are having trouble making your payments, there are still other repayment options available to you, including debt consolidation. If you have multiple student loans, you can bundle the debt into one-single payment. This might come with lower interest rates, but can potentially lengthen the loan term.

Under certain circumstances — graduate school, military deployment, financial hardship, for example — you might qualify for deferment or forbearance, which allows you to postpone or reduce payments.

Finally, if you’re eligible for loan forgiveness, the government can effectively cancel your loan and you will no longer have to make payments.

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