Why does the discretionary income definition matter for student loans? It’s an arcane term and sounds as interesting as watching grass grow, but it’s actually really important. Knowing the discretionary income definition allows you to know EXACTLY what you have to pay on your student loans.
Discretionary Income Calculator
The Discretionary Income Calculator below is completely updated with the latest 2021 poverty guidelines. You’ll see how much of your income the student loan servicers will use when calculating your income-based monthly student loan payments.
Discretionary Income Calculator
What is your family size? Enter the total number of people in your family including you, your spouse, and children your children. Include unborn children who will be born this year.
Where do you live?
What was your AGI (taxable income) on your most recent federal tax return?
Are you legally married?
| Your Discretionary Income for 2021 Is |
If your discretionary income is really high, you might consider refinancing to a lower interest rate with a company like Earnest. If you use the link below to apply, you could get thousands of dollars in interest savings along with a large cash bonus as a Student Loan Planner reader.
Do you think you could benefit from student loan forgiveness options? If so, check out more about our consult service after we get done explaining discretionary income.
What is Discretionary Income and Why Should I Care?
Discretionary income is typically defined as what you have left over after you’ve covered your necessary expenses (like rent/mortgage, groceries, utilities, etc.). Often, this type of discretionary income is contrasted with disposable income which is your take-home pay after your social security and income taxes have been taken out out of your paycheck.
With such a broad definition, it can be difficult to determine exactly what one’s discretionary income is. Expenses that one person feels are necessities may seem like luxury items to someone else. The Department of Education needs a concrete way to determine your discretionary income for the purpose of calculating your student loan payments.
The federal government created Income-Driven Repayment (IDR) plans because they want payments on federal student loans to be affordable no matter how much you owe. How does the government figure out what an affordable payment is though? That’s where the discretionary income definition comes in.
Income-Driven Repayment programs like REPAYE, PAYE, IBR, and ICR take 10% to 20% of your “discretionary income.” That means the government needs a standardized formula to figure out what they are supposed to charge you.
Once you know how to calculate YOUR discretionary income, you’ll never need to worry or wonder what your student loan payments are going to look like ever again.
Discretionary Income Calculation Depends on Your Family Size
The discretionary income definition is a technical one, but it’s easy to understand. There are three steps in the calculation.
Step 1: Look up the Federal Poverty Line (FPL) for your family size
You can find these numbers by searching “federal poverty guideline” or by checking out the numbers over at the ACA Exchange. The contiguous United States and the District of Columbia all have the same poverty guidelines. But if you live in Alaska or Hawaii it’s a bit higher.
Here’s the list of federal poverty line values for the contiguous states in 2021.
- $12,880 for a family size of one
- $17,420 for a family size of two
- $21,960 for a family size of three
- $26,500 for a family size of four
- $31,040 for a family size of five
- $35,580 for a family size of six
- $40,120 for a family size of seven
- $44,660 for a family size of eight
- Each additional family member: add $5,680
Step 2: Multiply the Federal Poverty Line for Your Family Size by 150%
You know how when you’re doing your income taxes you get to deduct something from your income? The discretionary income definition is similar. You get to deduct a certain amount of money from your adjusted gross income before the government wants a percentage of it under an income-driven repayment program.
Now we’ll learn how to calculate that deduction.
Take the federal poverty number for your family size and multiply it by 1.5. That’s 150% of the poverty line.
Let’s look at the father in Virginia with a family size of four. His poverty line number in 2021 was $26,500. Take that number from 2021 and multiply by 1.5. His deduction for the purposes of the discretionary income definition is $26,500*1.5= $39,750.
For a single person, that deduction would be $12,880*1.5 = $19,320.
Step 3: Take Your Adjusted Gross Income from the Previous Tax Year and Subtract the Deduction. That’s Your Discretionary Income
Remember I said steps one and two give you the amount of income that the government won’t count in your student loan payment calculation. Here’s how the mechanics of that works.
Say the dad from Virginia has a spouse who makes $60,000 per year. He makes $100,000 and has $300,000 of law school loans. Say their combined income on the previous year tax forms shows $160,000.
To find his annual payment under Pay As You Earn and Revised Pay As You Earn, he would take $160,000 – $39,750 = $120,250 and multiply that by 10%, which equals $12,025. Divide that number by 12 to get the monthly payment required of $1,002.08.
How to Use the Discretionary Income Definition to Find Out What You’ll Pay After Graduation
Most people don’t make any income while they’re in grad school. They might have a working spouse, and if so that will influence the required payments under an income driven repayment program.
For example, let’s say Jane is a graduating med student and her husband Matt is a teacher. Matt makes $50,000 per year and Jane made $0 last year.
Using the discretionary income definition, we first look up the federal poverty line for their family size of two. That is $17,420. Now we multiple by 1.5 to get $26,130.
Take $50,000 and subtract $26,130 to get $23,870. Now multiply by 10% and divide by 12 to get a monthly payment of $198.92.
Of course, if Jane had no spouse, then her payment in the first year would’ve been $0 a month.
If you wanted to know how much you’ll have to pay on your student loans, use our Income-Based Repayment calculator to see what you would pay on IBR, PAYE, or REPAYE.
The Income-Contingent Repayment plan (ICR) is generally unhelpful as it’s the only one of the current plans that bases payments on 20% of discretionary income instead of 10%. However, it’s the only IDR plan that Parent Plus loan borrowers are able to join.
Can Discretionary Income Show my Student Loan Payment for Future Years?
Your discretionary income can absolutely give you a picture of what your student loan payment for future years will be. First, you need to know that your student loan servicer uses your prior year’s annual income in the calculation.
So say your re-certification date for REPAYE is coming up this September. You graduated in mid 2020 and have been paying $0 for the past year. You’re really worried what they’re going to ask you to pay come September.
Say you worked half the year and made $60,000 (maybe you are a dentist or something like that).
Take your adjusted gross income from 2020, find the 2021 poverty line number for your family size and multiply by 1.5, then subtract that from your 2020 taxable income. Multiply the result by 10% and divide by 12.
There ya go! That’s what you’ll pay for student loans when your certify in September.
How Does Discretionary Income Affect Student Loan Payments Over Time?
Great question. Discretionary income changes every year and is dependent upon taxable income, family size, and the government’s federal poverty line numbers. That means student loan payments change too every year under REPAYE/PAYE/IBR.
The federal poverty line increases over time because of inflation. That means your discretionary income, or the deduction you get before having to pay a percent of your income to student loans, would increase yearly as well.
Keep in mind that for most people with student loan debt, your income would be larger than the poverty line. Your income would also probably grow at the rate of inflation or potentially more than that.
However, if you suffered a pay cut, your student loan payments would decrease. And if you experienced a job loss or any reduction in pay so dramatic that it dropped your income below 150% of your federal poverty guideline, your monthly payment would be $0.
But if you aren’t making any payments, what will happen to your student loan balance? It will continue to grow as it accrues unpaid interest. However, keep in mind that once you reach end of your repayment term (20 to 25 years), any remaining balance will be forgiven.
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Hi Travis – I noticed that the free student loan calculator spreadsheet that you link to above seems to adjust discretionary income for family size under REPAYE but not under PAYE/IBR. Does PAYE/IBR ignore family size in determining the poverty level for purposes of calculating your discretionary income?
No it should adjust. I put the discretionary income calculations in two separate columns so you can adjust for filing taxes separately under PAYE / IBR, which you cant do on REPAYE. It should work fine.
Okay, got it. Makes sense now. Appreciate the explanation!
(I think I confused the spreadsheet — and myself — by accidentally putting in “married filing separately” with an initial family size of 1, which is obviously not a real life scenario, so no surprise I got an odd result.)
Thanks again!
Hi Travis,
I appreciate you offering this information. I am having a hard time following each sample given. Ie
I am a family of 1, I see the amountil given in the FPL $12,060 × 150% (1.5)
Then what…can you finish this calculation and tell me what if any my payments are? OSLA asked me for my “current” income. I finished school last August 2018 was in a certificate program…I already owe $55,000. I feel they have been screwing me for years. Can they include Unemployment income? I was on unemployment first fro.June 30, 2017 until December 31, 2017, then January 30, 2019 until June 30, 2019. I also worked a part-time job making $117 a week, then approx $200 a week from Sept to Dec.
I understand calculation better… not in a paragraph form,
Federal Poverty level. $12,060
(150% of FPL) X 1.5
Then what? Can you finish your thought on the complete picture? Thank you…
I just started working 35 hours, so my income has fluctuated from January until now. I get paid bi-weekly. I don’t get what I need to calculate once I multiply $12,140 × 1.5 =
What do I need to do with my income?? Thanks, Denise
Denise say you made $20,000 per year on your last year’s tax return. You could submit that return to OSLA if your debt is federal, and they should tell you that your discretionary income is $20,000-1.5 x $12,140 = $1,790. On PAYE or REPAYE you’d pay 0.10 x $1,790 = $179 per year, or $14.91 a month.
I’m married with no children. My wife and I are considering filing separate tax returns this year to reduce our student loan payments. If my wife and I file separately, would each of our discretionary income calculations be based on a household size of 1, or 2?
If you file separately then it should be based on household size of 1 each not 2. Generally if you both have debt it’s not worth it to file separately
Hi Travis thank you for this site and generous content!, you’re brilliant. My question is while I am in the process of re-certifying for IBR Should I also be considering simultaneously to apply for a lower interest-rate?
Thanks, Jackie
Only if you want to leave the IBR plan and sell your loan to a private lender who will give you a lower rate. But then you cant do IBR
Hi Travis
Thank you for assisting with all questions. My question is if I’m paying child support does that reduce my discretionary income? My last tax return was married filing separately due to an upcoming divorce.
Any options I look at for reducing the amount of my payments so far are only based on income not expenses.
That’s a very complicated question because the new tax law treats child support and alimony differently I think, so you’d have to check with a lawyer. I’m pretty sure it has no impact though.
Hello Travis,
I want to recalauate my monthly payment because I teach school and my pay is less in the summer. I get paid for 10 months but elected it to be paid out on a 12 month installment. However, I do’t get my local supplement during the summer so I make less about 900.00 less. I want to submit my pay stub for June to fed loan with my lower gross monthly earnings but I’m afriad they will use my yearly gross income shown also on my pay stub and recalualte and then I’ll have a higher monthly payment instead. My question is if I re submit my pay stub for Jue wihich is 900.00 less will they use my monthly gross earning to recalualte my new monthly payment or will they use my year to date amount listed on my pay stub. Please advise…as soon as possible
You’re really supposed to use tax returns in this scenario. I personally don’t feel comfortable recommending paystubs in this situation
This is great stuff Travis! Very impressive!
Hello Travis,
Both my husband and I have student loans. Since they take both of our incomes into the equation, does that mean that is the maximum amount we will pay for both of our loan payments combined? Thanks so much. LGB!! We also love the STL Zoo.
They dont double count your income if you both have loans. You’ll pay a very similar amount compared with if you were single. Yep PLAY GLORIA!
Hi Travis,
Kind of in a sticky situation here. I have approx. $325k in student loan debt. Mostly Federal with some Private loans as well. I am currently making payments on my Private loans which total around $500-600/month.
I unfortunately defaulted on one of my federal loans and am currently going thru the loan rehabilitation program. Payments for that is approx. $1,300/month. I need to start paying on my other Federal Loans so I don’t fall into default.
Am married with one kid and one on the way next month. Our household income last year was about $150,000.
So I am currently paying approx. $2,000/month in student loans (Private/Federal) with more likely to be added once I start paying the other Federal Loans. I really cant afford much more with other bills added on plus the new addition to our family. Do Lenders take other student loans into account? I really need to consolidate but have to wait until after the rehabilitation program is done in 10 months. Thank you for any advice.
Well you only have to wait to consolidate if you dont want the default hurting your credit score. If you already have a mortgage and a car and dont need great credit then maybe you could just pull the trigger. But yeah once that rehab payment is over you definitely need to be on REPAYE or PAYE to pay a lot less on your federal loans. That’ll certainly help
Hello! Thanks for the formula. How can an individual filing as a single person lower their agi in a smart way? Do contributions to an HSA for 401k lower agi and therefore lower ibr payments?
Hi Elizabeth,
Both HSA and 401(k) contributions can lower your AGI. You’ll have to crunch the numbers and possibly talk with a CPA to see how it would work out in your specific situation, but this is certainly something you could look into.
Hello Travis,
Thanks for the information. I have a question regarding lower payment options. My wife and I have been filing taxes jointly as long as we’ve been married, but in an effort to reduce my student loan payments through my Income Driven Repayment Plan, can I file taxes separately? Is this a common strategy for lowering payments (temporarily)?
Hi Gerald,
It depends on which IDR plan you’re on. If you file taxes separately on PAYE or IBR, your monthly payment will be based on just your adjusted gross income. This doesn’t apply to REPAYE, however, which uses your married joint AGI regardless of how you file. You’ll have to crunch the numbers to see what makes the most sense for you, which you can do with our calculator here: https://www.studentloanplanner.com/free-student-loan-calculator/
You can find more information on this here: https://www.studentloanplanner.com/married-filing-separate-paye-and-ibr/
https://www.studentloanplanner.com/student-loan-and-taxes-everything-you-need-know/
Your 2019 FPL is showing 2018 values
Dang the table didn’t save, fixed it. Thanks for pointing that out Javier.
I just got married a couple of months ago. I have approx. 47,000 in student loans. My husband about 55,000. He makes around 40,000 and I around 35,000. My question is, if we file jointly, and they use both of our totals, will be both be paying an exorbitant amount, or would it be pretty reasonable? His currently is only 75 dollars a month, I am just about to finish school. I am not wanting to pay 200+ a month a piece just because our income is combined. So, how does that work? Will we both have to pay higher because they combine our income for both mine and his IBR or will we just pay around the same? Hope that makes since.
You’ll pay more if you file jointly so that’s one reason people hire us to do an analysis of the right path studentloanplanner.com/help
Hello Travis,
Really struggling figuring out how much my monthly payment will be. I’m a teacher, who is about to finish grad school, will still continue teaching. I owe about 50,000 on Fed loans and earn about 102,000 a year. What might my monthly payments look like?
They’ll be the standard 10 year plan since you earn much more than you owe. About 500 a month.
Hi,
what if your monthly income changes month to month and isn’t consistent (i.e. your a dentist who owns his/her own practice), how do you calculate the exact amount you owe on a monthly basis? If you accidentally overpay on a month using REPAYE or PAYE, can that extra go to a future payment, or will it automatically be applied to the accruing interest (which is bad if you’re going for forgiveness and want to pay as little as possible)? If you somehow underpay, do you make up that difference at the end of the fiscal year after submitting your taxes?
Payments based on your income use tax returns, specifically your AGI, to determine your monthly payment. So it isn’t a month-to-month calculation. When you certify your income for PAYE or REPAYE, you typically have the same payment amount for 12 months.