Sherpa Note: The calculator below will generate estimated discretionary income, not estimated monthly payments.
The article below will explain how discretionary income is calculated and how it is used to calculate payments.
If you just want to know your estimated monthly payment, check out the new SAVE/REPAYE calculator, which incorporates the newest federal repayment plan.
What is discretionary income for student loans?
Your discretionary income is crucial when calculating student loan payments on income-driven repayment (IDR) plans.
The government defines discretionary income slightly differently, depending on your repayment plan. If you sign up for REPAYE/SAVE, your discretionary income is the money you make above 225% of the federal poverty level in your state. Borrowers on IBR and PAYE get the less favorable number of 150% of the federal poverty level. Finally, ICR uses 100% of the federal poverty level for discretionary income calculations.
If the math seems complicated, monthly discretionary income calculations can be made using the calculator above.
Why does my discretionary income matter for student loan payments?
If you have federal student loans, some of the best repayment plans are income-driven repayment plans such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). These plans are the best because your student loan payment is based on what you can afford rather than how much you owe. For many borrowers, this can result in a significant reduction in minimum monthly payments. In some cases, borrowers qualify for $0 per month payments.
Under IBR, the Department of Education expects you to pay 15% of your discretionary income towards your student loans. The PAYE and REPAYE plans reduce that number to 10%. Details like your marital status and when you first borrowed a student loan will impact which Income-Driven Repayment Plan is best. When the SAVE plan is fully implemented, borrowers will pay between 5% and 10% each month.
But what exactly is discretionary income for student loans?
Before paying anything under IBR, PAYE, or REPAYE, the government lets you keep 100% of your salary up to a certain point. That number is set at 150% of the poverty level. According to the Department of Education, this is the non-discretionary portion of your income. The federal poverty level changes yearly and is based on your family size. For 2023, the numbers look like this:
| Household Size | 150% of Poverty Level |
|---|---|
| 1 | $21,870 |
| 2 | $29,580 |
| 3 | $37,290 |
| 4 | $45,000 |
| 5 | $52,710 |
| 6 | $60,420 |
| 7 | $68,130 |
| 8 | $75,840 |
*Note: these numbers are for the 48 Contiguous States… Alaska and Hawaii have slightly higher numbers.
When calculating student loan payments, your discretionary income is every dollar (pre-tax) that you make above the numbers listed on the table. Suppose your housed size is three, and you make $49,290 per year. In this example, your discretionary income would be $12,000 per year. We get this number by subtracting the $37,290 for a family of three from the $49,290 yearly salary.
Calculating your payments in 2023
Once you determine your monthly discretionary income, multiply that number by the percentage your repayment plan charges. For example, suppose you had a monthly discretionary income of $1,000. If you were on the old IBR plan charging 15%, your monthly payment would be $150; if you were on PAYE getting charged 10%, your monthly payment would be $100.
Note: the exact calculation will vary depending on how you verify your income with your lender. Some people use their two most recent pay stubs, while others use last year’s taxes. If you use your most recent tax form, it will use your Adjusted Gross Income or AGI.
Why is discretionary income an unfair calculation?
How much you can truly afford to pay depends upon a whole lot more than just the size of your family. Unfortunately, these factors are not considered. If you have medical bills, owe child support, or have other private student loans, your discretionary income does not change.
The 48 contiguous states are all treated the same. Whether you live in rural Kansas or San Fransisco, the numbers do not change. Applying the exact same standard without adjusting for the cost of living means some borrowers will have a discretionary income that exaggerates how much they can reasonably afford.
Sheltering income from discretionary income calculations
However, as noted earlier, for most people, income is based upon their AGI.
Borrowers can keep this fact in mind when doing their tax planning.
My favorite strategy is to put money in tax-advantaged retirement accounts like a 401(k) or traditional IRA. Putting money in an eligible retirement account will result in a lower AGI.
Putting some money in a traditional IRA will do the following:
- Lower monthly student loan payments,
- Lower the amount spent on taxes, and;
- Build retirement savings.
The approach is especially powerful for borrowers working towards student loan forgiveness because it means more debt will be forgiven in the end.
Unfortunately, not all borrowers are in a position to set aside extra money for retirement. The good news is that there are other ways to lower your AGI. Borrowers should seek out tax breaks that are considered to be above-the-line. I’ll skip the details on AGI calculations, and just point out that any above-the-line deduction will reduce the AGI.
I work for the VA and have a base salary and added Locality pay. The Locality pay is an acknowledgment by the feds that the cost of living in the area of my employment is higher than the norm. Why is my locality pay counted when figuring my monthly discretionary income/monthly payment?
You have identified one of the many ways the discretionary income calculation isn’t really fair. Whether you live in an expensive place like New York City or in an area with a very low cost of living, the Discretionary Income calculation doesn’t change. (The formula is a bit different for Alaska and Hawaii, but the other 48 states are treated the same.)
There are a few ways to shelter income from the calculation, but it requires a bit of careful tax planning.
I have parent plus loan debt of 82K and consolidated the loans with a payment of $570 per month. When my husband and I retire we plan to live primarily on our social security. We have 401Ks as well. How do required minimal distributions factor into our AGI? I plan to attempt to get an Income Contingent payment plan after retirement.
Social security income can be tricky for income-driven repayment plan calculations. If you are living exclusively on social security income, it will usually mean $0 per month payments.
The Minimum required distributions may shift the calculations. In retirement, traditional 401(k) withdrawals are treated as income and would impact your AGI. If you are pulling out a few thousand dollars per year, the impact on monthly payments will be minimal. If you are pulling out 100k per year, it means larger payments.
While my son was in college we took out a Parent Plus loan for him. At that time, repayment would not have been an issue. However, circumstances changed and our income has declined drastically. We are now below poverty level and the loans enter repayment next month. Can we apply for any type of income-driven repayment plan and if so, is there a way to determine what my payment might be?
one question what qualifies as a household size? my grown son and his girlfriend live with me and he has a low paying job and she is unemployed both uder 25 do they make me qualify as a family of three
Family size is defined slightly differently than what it is for tax purposes.
Here is a link to the income-driven repayment plan application: https://static.studentloans.gov/images/idrPreview.pdf
Family size is defined in section 9 as follows: Family size always includes you and your children (including unborn children who will be born during the year for which you certify your family size), if the children will receive more than half their support from you. For the PAYE, IBR, and ICR Plans, family size always includes your spouse. For the REPAYE plan, family size includes your spouse unless your spouse’s income is excluded from the calculation of your payment amount. For all plans, family size also includes other people only if they live with you now, receive more than half their support from you now, and will continue to receive this support for the year that you certify your family size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. Your family size may be different from the number of exemptions you claim for tax purposes.
I have over $250,000! in graduate school loans. I have signed up for the PAYE repayment plan. I am not clear about the interest capitalization as I have read in some places that the maximum interest capitalization is 10% of the loan balance at the start of the repayment period. Can you please clarify the interest capitalization associated with such loan balances as my monthly payments now and in the future may be less than the monthly interest accrual.
Excellent question. Capitalized interest becomes an issue if your monthly payment is smaller than the interest that accrues each month. You can read more about this topic and how to deal with it here: https://studentloansherpa.com/federal-student-loans-capitalized-interest/
What is the benefit of using the most recent 2 pay stubs vs the AGI? If any?. Would the 10% be calculated straight from the net income? Or would it be lower?
I made 4 times more than my wife, she have $100k in student loan and I have 0. Filling taxes jointly would benefit the tax burden but hurt us because of the higher repayment every month. Can we benefit by filling jointlyh but then reporting her most current 2 pay stubs for the repayment? Thanks
People normally go with the two most recent pay stubs if they have a lower salary than what they made last year. If your salary is the same, using the AGI is normally the preferred way.
If you file jointly, they will use your income in the calculations, whether it be via tax return or pay stubs. This article might help you evaluate your situation: https://studentloansherpa.com/taxes-student-loans-married-filing-jointly-married-filing-seperately/
What if you already have your own student loans in the REPAYE plan, and acquire new parent plus loans for your kid? I assume you can consolidate just the parent plus loans, then use the ICR plan for just those, but how will that affect the payment? Will the REPAYE plan take the ICR plan into account when calculating the monthly payment?
Very interesting questions.
First thought: be careful not to combine your Parent PLUS loans with your other student loans in a federal consolidation. If you do that, then your other loans lose eligibility for repayment plans like REPAYE.
How did your loan servicer say they would be calculated if you are on both ICR and REPAYE?
Right, those REPAYE loans are almost halfway to PSLF, so those won’t ever be reconsolidated with anything. But my daughter doesn’t start school until August, and I don’t have the parent plus loans quite yet, so I don’t know how my loan servicer will calculate the payment payments. I was hoping there was a straight forward answer, but i’ve been unable to find out any info anywhere. It’s as if no one in an IDR payment plan has ever had parent plus at the same time, lol.
I had to do the parent plus loan for my daughter. The loan is $30,000. It was supposed to be my daughters loan. We told the college that. We were ignorant to the process. Instead it all appears in my name like i went to college. I make $43,000 my wife does not work. I have a son that wants to go to college but i dont have the money to make payments on the first loan. Now my daughter dont have to pay anything because its not in her name. What kind of messed up deal is this and now what? File bankruptcy?
Bankruptcy is a difficult option. It is hard to succeed in a bankruptcy case on student debt, but it is possible.
You might benefit from signing up for an income-driven repayment plan. Your loan servicer can talk you through the process. It won’t make the debt disappear, but it will help you stay current on the payments. Rather than paying based upon what you owe, an income driven repayment plan will determine payments based upon what you can afford to pay.
I just found out that I am in the same boat. My son owes $69,000 and I was told that it is totally my responsibility. They have already taken my Federal tax return and are now telling me that they are going to garnish my wages ($250 a week) and then take my Social Secrurity when I retire next year, I am financially ruined because of this loan.
Does overtime count as discretionary income or just base pay?
Overtime will increase your yearly income, so it shows up on your AGI in your tax return. If you document your income with paystubs and have overtime on the paystubs, expect it to increase your discretionary income.
Can you go over the tax implications of student loan forgiveness? I currently owe above 100,000. Based on a student loan calculator I may have close to 300,000 in forgiveness based on the interests rates for 25 years. I would like to know how to determine how much I will have to pay in taxes in an amount like this.
Projecting the exact amount of the tax decades from now is nearly impossible given how income can change over the years, and tax rates also change. This article does offer some additional thoughts on planning for this issue: https://studentloansherpa.com/preparing-ibr-tax-bomb-student-loan-forgiveness/
discretionary income is a factor for determining monthly payments on income driven repayment plans for federal loans. Federal loans do not have co-signers.
However, if your friends mother had a Parent PLUS loan in her (the mother’s) name, that would be different.
Can you clarify what the situation is?
My friend’s mother is a co-signer on her student loan. The mother had a one time windfall of income from the sale of a partnership interest – about $500,000. Is there any way this can be eliminated from the income calculation?
I’m 66 years old with a $40,000 student loan. I was forced to retire early , must care for Mom with Alzheimers. I’m living on $945 mo social security and job pension of $425 mo. At this time I’m billed $0 for student loans on IBR due to low Discretionary Income
Hello,
Are 401 K contributions counted as part of your discretionary income for IBR? Or, would contributing more to 401 K lower discretionary income and loan payments? Thanks!
401(k) contributions are “above the line” deductions, meaning they lower your AGI. Because they lower your AGI, they lower your discretionary income, meaning 401(k) contributions will result in lower student loan payments.
My unmarried son only has an income of $14,000. Would he qualify for loan forgiveness? Thanks.
Hi Rita. There are a number of different student loan forgiveness programs out there. At your son’s current salary, he could likely sign up for an income-driven repayment plan and his monthly payment would be $0 per month. The loan would not be forgiven right away, but each month would count towards the 20 to 25 years required for student loan forgiveness on the income-driven repayment plans.
The federal student loan repayment estimator is a great tool for figuring out which repayment plan is best and how much debt can potentially be forgiven. You can find it here: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action
My loan balance is still around $50,000 even though I graduated over 11 years ago. Now Trump wants to approve doing away with the public loan forgiveness, something I have been living in poverty for and praying the ten years arrives quickly. I took a job with the VA but if this passes I will quit and go to work for a private hospital. Period.
Trump does want to get rid of the Public Service Loan Forgiveness program, but everything that I have seen indicates it will only be eliminated for new borrowers. Those of us already working towards it should be grandfathered in, unless something changes. If you are working towards PSLF, make sure you submit an employment certification for in to make sure that you are working for an eligible employer, your loans are eligible, and you are on the right repayment plan.
So what if you and your spouse BOTH have student loans? Say my wife and I made $100k and had a house hould of 4. would the amount be 15% of 64k for EACH of us? meaning we Could both pay $800 or $1,600 total OR 15% househould meaning we could only pay $800 total?
Great question Ken. It is the second one. So it would be 15% of total household income… not 30%.
So if your wife had a balance of 30k on her student loans and you owed 10k, and we use your $800 number for your household, your monthly payments would be $200, and your wife would be $600 because she has a balance triple yours. If you each have the same amount of debt, your payments would each be $400.
I have mandatory retirement taken out. How come that is not factored into discretionary income? In bankruptcy it is factored in. I’m in the process of recertifying my IBR. Nelnet has increased my payments by $140 a month, even though I make the exact same amount of money! They are using a paystub, instead of AGI. Is AGI better?
Suppose I am retired on an IBR loan repayment, and then decide to go back to work for awhile. Do I report my income when I begin working, or when I need to re-qualify in the Spring? Or will I owe more for the months that I worked while on the old plan?
The IBR certifications are done on a yearly basis. Next time your IBR payments are calculated the extra income will be picked up because it will appear on your most recent tax return.
“Suppose your housed size is 3 and you make $42,135 per year.”
Say this is the income of the person with the student loans; but the spouse also has income of $57,865. The combined income is $100,000 per year.
Would discretionary income then be calculated based on the combined income of $100,000?
Or only the $42,135 income of the person with the loans?
Is this where filing jointly vs separately can make a difference?
I found this answer to your question. Hope this helps!
Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.
That is correct. The repayment plan you select and how you file your taxes can both impact whether or not spousal income is included in discretionary income.
I did some extra research. I live in Texas which has community property. This means roughly that half of what each spouse makes goes to the other — and when you file taxes separately, the difference between the individual’s income and what corresponds due to community property is adjusted as more profit or loss.
For example: husband makes $40,000 and is paying back student loans though IBR. Wife makes $100,000 and has no debt. Under community property rules they made $140,000 ($70,000 for each) so the husband must adjust his income +$30,000 in order to make the difference. Wife adjusts -$30,000.
When discretionary income is calculated for IBR, it will be done considering $70,000 as the income, not $40,000.
Needless to say, this increases IBR payments significantly in my example.