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How is my Discretionary Income Calculated for Student Loan Payments? 

If you are thinking about IBR, PAYE or REPAYE, learning how to calculate discretionary income can help save money on student loan payments.

Written By: Michael P. Lux, Esq.


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How is my Discretionary Income Calculated for Student Loan Payments? 

If you are thinking about IBR, PAYE or REPAYE, learning how to calculate discretionary income can help save money on student loan payments.

Written By: Michael P. Lux, Esq.


Affiliate Disclosure and Integrity Pledge

Your discretionary income is the most important number when calculating student loan payments on income-driven repayment (IDR) plans.

Fortunately, discretionary income calculations are easy. Better yet, the Department of Education now has a great tool for estimating monthly payments on the various federal repayment plans.

This article will cover the basics of discretionary income calculations, explain why these calculations can be unfair, and I’ll share some of my favorite “hacks” to lower your monthly payments.

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). 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%. Details like marital status and when you first borrowed a student loan will 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 2022, the numbers look like this:

Household Size150% 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 $46,545 per year. In this example, your discretionary income would be $12,000 per year. We get this number by subtracting the $34,545 for a family of three from the $46,545 yearly salary.

Calculating your payments in 2022

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 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.

One of the most useful tools for calculating monthly payments is the Federal Loan Simulator. This tool allows you to use your actual loan information in generating the estimated monthly payments. It also helps with student loan forgiveness planning.

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.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

39 thoughts on “How is my Discretionary Income Calculated for Student Loan Payments? ”

  1. 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?

  2. 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?

  3. 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

  4. 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.

    • 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

  5. 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.

  6. 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.

  7. 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?

  8. 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?

  9. “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.

      • 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.

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