Article Updated 8/27/20 to include the updated numbers for 2020.
If you have federal student loans, some of the best repayment plans are the income-driven repayment plans such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). The reason these plans are the best is that your student loan payment is based upon what you can afford rather than how much you owe. For many borrowers, this can result in a significant reduction in minimum monthly 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%. Which plan you qualify for depends upon when you took out your first student loan. Your marital status and whether or not your spouse has federal student loans can also impact which Income-Driven Repayment Plan is best.
But what exactly is discretionary income for student loans?
Before you have to pay 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 portion of your income that is non-discretionary. The federal poverty level changes each year and is based upon your family size. For 2020, the numbers look like this:
|Household Size||150% of Poverty Level|
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 $44,580 per year. In this example, your discretionary income would be $12,000 per year. We get this number by subtracting the $32,580 for a family of three from the $44,580 yearly salary.
Calculating your payments
Once you determine your discretionary income, divide that number by 12. The new number is your monthly discretionary income. In our example, it would be $1,000. That means that if you were on IBR, your monthly payment would be $150, and if you were on PAYE or REPAYE, 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 there two most recent pay stubs while others use last year’s taxes. If you use your most recent tax form, it will be based upon your AGI.
One of the most useful tools for calculating monthly payments is the Federal Repayment Estimator. This tool allows you to use your actual loan information in generating the estimated monthly payments. It also helps with student loan forgiveness planning.
What isn’t factored into your discretionary income?
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.
However, as noted earlier, for most people, income is based upon their AGI. If you plan ahead, you can lower your AGI and set extra money aside for retirement. Be sure to check out our tricks for lowering your AGI. Going this route will reduce your discretionary income, and it will result in lower PAYE and IBR payments.