Disposable income or discretionary income: definitions and calculations

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If you’ve ever filed a tax return, read a pay stub, or applied for an income-contingent repayment (IDR) plan for federal student loans, you realize you have more than one “level” of income.

There’s gross income — all the money you earn in a year. And net income is what you take home after taxes. At tax time, you’ll calculate your tax liability based on your adjusted gross income – your total income for the year minus certain deductions.

When you apply for an IDR plan, your loan officer will base your monthly payment on another level of income – your discretionary income. It is therefore important to understand what the term actually means.

Here’s what to know about discretionary income, how it differs from disposable income, and the role it plays in determining your monthly federal student loan payment:

Disposable Income vs Discretionary Income

Disposable income is your gross income less federal, state, and other withholding taxes. This is the amount of money you have left after taxes to spend on necessities and non-essentials.

In most cases, discretionary income is what you have left after taxes and the cost of necessary expenses. But for the purposes of income-based reimbursement plans, your discretionary income is the difference between your annual income and a percentage of the poverty level for your family size and the state you live in.

Important: The percentage of the poverty guidelines that applies to your discretionary income varies depending on your IDR plan.
  • For the income-contingent repayment plan, your discretionary income is the difference between your annual income and 100% of the applicable poverty level.
  • For income-contingent repayment and pay-as-you-go plans, your discretionary income is the difference between your annual income and 150% of the applicable poverty level.

When you enroll in an income-based repayment plan for your federal student loans, your monthly payment is based on your discretionary income.

Examples of Necessary Expenses

Here are some examples of what would be considered necessary expenses:

  • Housing, such as a mortgage or rent
  • Transportation
  • Food
  • Utilities
  • Assurance
  • Health expenditure
  • Childcare costs
  • Necessary clothes

Check it out: How much income should be spent on paying off student loans?

Discretionary income dictates your refund amount based on income

To estimate your payments under an income-driven repayment plan, you first need to calculate your discretionary income. To do this, you need to know your annual income and the poverty guidelines that apply to you. The US Department of Health and Human Services establishes the guidelines based on state residence and the number of people in a family.

When your federal loans are on an IDR plan, your monthly payment will be a percentage of your discretionary income.

Here’s how Discretionary Income is used to calculate your monthly payment under each type of income-driven repayment plan.

Pay As You Earn Reimbursement Plan (PAYE Plan)

If you qualify for a PAYE plan, you’ll pay 10% of your discretionary income for your loan each month, provided this amount is less than what you would pay under the standard 10-year repayment plan. If your annual discretionary income is less than your federal student loan debt, you will likely qualify for this plan.

For example: Your monthly discretionary income is $760 and your federal student loan balance is $10,000. You would qualify for the PAYE plan and your monthly payment would be $76, or 10% of your Discretionary Income.

Revised Pay As You Earn Repayment Plan (REPAYE Plan)

The Revised Pay As You Earn Refund Plan is similar to the PAYE Plan in that you will be required to pay 10% of your Discretionary Income. But this plan doesn’t limit your payment amount to what you would pay on the standard repayment plan. This means that if your income increases, your monthly payment could exceed what you would pay on the standard repayment plan.

For example:
  • In the first year of your repayment plan, your monthly discretionary income is $850.
  • Your payment under the standard repayment plan is $100 per month, but you qualify for REPAYE, which brings your monthly payment down to $85.
  • In the second year of your student loan, your monthly discretionary income doubles to $1,700.

Your new RPAYE monthly payment is $170 – 10% of your Discretionary Income and $70 more than your standard repayment plan amount.

Income Based Reimbursement Plan (IBR Plan)

Your monthly student loan repayment amount on the IBR plan is 10% if you are a new borrower, which means you had no outstanding balance on a direct loan or an FFEL loan. If you are not a new borrower, your payment is 15% of your Discretionary Income.

For example: Your monthly discretionary income is $880 and you had no outstanding federal loans when you took out your current loan. Your monthly student loan payment under an IBR plan would be $88.

Income Contingent Repayment Plan (ICR Plan)

If you are on the income-contingent repayment plan, you will pay the lesser of:

  • The amount you would pay with a 12-year, income-adjusted fixed-repayment loan, or
  • 20% of your discretionary income

The ICR Plan is the only income-based repayment plan available to parent borrowers who consolidate their Direct or Federal PLUS loans into a Direct Consolidation Loan.

For example: Your monthly Discretionary Income is $880 and your monthly payment under a 12-year repayment plan would be $200, or almost 23% of your Discretionary Income. With an ICR plan, you’ll end up paying $176 per month, or just 20% of your discretionary income.

The calculation of your discretionary income is different for an ICR plan than for other reimbursement plans, as it is based on 100% of the poverty level, as opposed to 150%. If you are unsure, the Department of Education loan simulator is a useful tool to help you determine how much you could earn in loan repayments each month. They will also help you calculate your discretionary income and ultimately your monthly student loan payment amount.

How to Calculate Discretionary Income for Student Loans

Here’s how to calculate your discretionary income for student loan purposes:

  • Determine the Federal Poverty Level (FPL) for your household size. You can find the most recent figures on the Assistant Secretary for Planning and Evaluation website. In general, the larger the size of your household, the higher the guideline amount will be. Note that Alaska and Hawaii have their own poverty level figures.
  • Multiply the FPL for your household size by 150% (or 100% if you’re on the ICR plan). For example, if you are married with one child and live in Alaska, your FPL is $28,790. Multiplied by 150%, your indicative amount is $43,185, or $28,790 if multiplied by 100%.
  • Subtract the above calculation from your Adjusted Gross Income (AGI). To determine your AGI, see last year’s Form 1040 federal income tax return. If your AGI is $67,850, your discretionary income is $24,665 for most IDR plans, or $39,060 for an income-contingent repayment plan.

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150% of monetary poverty line

The poverty guideline is a federal government threshold used to determine your eligibility for certain programs, such as federal student loan repayment plans. Alaska and Hawaii have slightly higher poverty lines.

The following tables show 150% of the poverty guideline for the 48 contiguous states and Washington, DC, plus Alaska and Hawaii:

48 contiguous states and Washington, D.C.
Number of people in the household 150% of poverty guideline
1 $20,385
2 $27,465
3 $34,545
4 $41,625
5 $48,705
6 $55,785
7 $62,865
8 $69,945
Number of people in the household 150% of poverty guideline
1 $25,485
2 $34,335
3 $43,185
4 $52,035
5 $60,885
6 $69,735
7 $78,585
8 $87,435
Number of people in the household 150% of poverty guideline
1 $23,445
2 $31,590
3 $39,735
4 $47,880
5 $56,025
6 $64,170
7 $72,315
8 $80,460

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