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|
*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.