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.
What is Discretionary Income and Why Should I Care?
The federal government created income based repayment because they want student loan payments 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 based 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 3 steps in the calculation.
Step 1: Look up the Federal Poverty Line (FPL) for your family size
You can find these numbers by googling Federal poverty line or by checking out the numbers over at the ACA exchange. The Federal Poverty Line is the same for all of the lower 48 states. If you live in Alaska or Hawaii it’s a bit higher.
Here’s the list of federal poverty line values for the continental US in 2019.
- Family size 1: $12,490
- Family size 2: $16,910
- Family size 3: $21,330
- Family size 4: $25,750
- Family size 5: $30,170
- Family size 6: $34,590
- Family size 7: $39,010
- Family size 8: $43,430
- Each additional family member: add $4,420
Take your AGI on your tax return and subtract 1.5 times this number and you have your discretionary income.
The poverty line for a family of 4 back in 2018 was $25,100. If I was single with no children, then it would have been $12,140 in 2018. Take a moment to find the relevant number for your family size and make a mental note of what it is in 2019.
As an example, let’s pretend I’m a married father of 2 living with my family in Virginia.
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 Line 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 4. His poverty line number in 2017 was $24,600, slightly less than what it is now in 2019. Take that number from 2017 and multiply by 1.5. His deduction for the purposes of the discretionary income definition is $24,600*1.5= $36,900.
For a single person, that deduction would be $12,060*1.5= $18,090.
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 1 and 2 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 – $36,900 = $123,100 and multiply that by 10%, which equals $12,310. Divide that number by 12 to get the monthly payment required of $1,025.83.
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 $16,240. Now we multiple by 1.5 to get $24,360.
Take $50,000 and subtract $24,360 to get $25,640. Now multiply by 10% and divide by 12 to get a monthly payment of $213.67.
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 student loans, download my free student loan calculator that does all the heavy lifting for you.
How Does Discretionary Income Impact IBR?
It’s largely the same math as above. Instead of multiplying the leftover amount after subtracting 150% of the federal poverty line by 10%, you multiply by 15%. That’s because IBR is 15% of your income and PAYE and REPAYE are 10% of income.
Can Discretionary Income Show my Student Loan Payment for Future Years?
It can absolutely. First, you need to know that student loan servicers use prior years’ taxable income in the calculation. So say your re-certification date for IBR is coming up this September. You graduated in mid 2016 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 2016, find the poverty line number for your family size and multiply by 1.5, then subtract that from your 2016 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.
Here’s an example of the discretionary income over time of Jim, a veterinarian with $300,000 in student debt. He makes $65,000 and gets 5% raises each year. He’s getting married to someone with a $30,000 income and no student debt in 2019. They’re expecting 2 children to be born in 2020 and 2022. Here’s how that would look assuming a 3% growth rate in the federal poverty line.
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Ian says
January 25, 2019 at 10:53 amHi 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?
Travis Hornsby says
January 27, 2019 at 6:31 amNo 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.
Ian says
January 27, 2019 at 7:14 amOkay, 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!
Denise L. Perrault says
April 4, 2019 at 4:34 pmHi 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
Travis Hornsby says
April 4, 2019 at 8:34 pmDenise 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.
Tom says
April 9, 2019 at 12:29 pmI’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?
Travis Hornsby says
April 9, 2019 at 8:35 pmIf 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
Jackie says
April 16, 2019 at 9:44 amHi 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
Travis Hornsby says
April 16, 2019 at 12:21 pmOnly 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
Leslie says
June 26, 2019 at 12:44 pmHi 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.
Travis Hornsby says
June 27, 2019 at 3:14 pmThat’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.
Joanne says
June 27, 2019 at 7:54 amHello 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
Travis Hornsby says
June 27, 2019 at 3:07 pmYou’re really supposed to use tax returns in this scenario. I personally don’t feel comfortable recommending paystubs in this situation
Michael says
June 27, 2019 at 7:17 pmThis is great stuff Travis! Very impressive!
Jennifer says
July 2, 2019 at 1:28 pmHello 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.
Travis Hornsby says
July 2, 2019 at 4:33 pmThey 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!
Thomas Rios says
July 17, 2019 at 1:45 pmHi 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.
Travis Hornsby says
July 18, 2019 at 7:27 amWell 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
Elizabeth says
July 25, 2019 at 2:49 pmHello! 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?
Ashley Harrison says
August 2, 2019 at 2:46 pmHi 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.
Gerald says
July 30, 2019 at 11:02 amHello 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)?
Ashley Harrison says
August 2, 2019 at 2:30 pmHi 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/
Javier Serrano says
September 24, 2019 at 9:36 amYour 2019 FPL is showing 2018 values
Travis Hornsby says
September 25, 2019 at 10:30 amDang the table didn’t save, fixed it. Thanks for pointing that out Javier.
Julie B. says
December 10, 2019 at 5:22 pmI 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.
Travis at Student Loan Planner says
December 13, 2019 at 10:24 amYou’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