Discretionary income is the metric used to calculate how much a borrower will pay under an income-driven repayment (IDR) plan. A borrower’s discretionary income is based on a few different factors th꧂at gauge their overall financial situation, includi🌟ng their annual income and family size.

Borrowers with higher incomes and smaller families can typically afford larger student loan payments based on this metric, whereas those with lower incomes, bigger families, or both can qualify for lower monthly payments. Required payments on income-driven plans can even be as low as $0 for borrowers with limited discretionary income, per the U.S. Department of Education.

Read on for more information on how discretionary income on student loans works, how it applies to different IDR plans, and other deta✅ils you should know.

Uꦑnderstanding Discretionary Income on ♌Student Loans

澳洲幸运5官方开奖结果体彩网:Discretionary income typically refers to the money you have left over after you pay your taxes and other necessary expenses. With 澳洲幸运5官方开奖结果体彩网:federal student loans, this metric is used to determine the monthly payments due under an IDR plan.

These plans base a borrower’s discretionary income on the difference between their income and a percentage of the federal poverty guideline (based on family size and state of residence). Tax 澳洲幸运5官方开奖结果体彩网:filing status can also affect the discretionary income calculation.

Imp💛act of Discretionary Income on Repayment Plans

Borrowers using the standard, 10-year repayment plan don't need to worry about discretionary income (in this context). Under this plan, monthly payments are based on how much is owed and the 澳洲幸运5官方开奖结果体彩网:fixed interest rate that applies.

Discretionary income only matters for IDR plans and loans repaid through the federal loan rehabilitation program, Fresh Start, for borrowers in default.

Impact on Income-Driven Repayment Plans

The chart below shows how discretionary income is calculated for an IDR plan.

Impact on Loan Rehabilitation Programs

Loan rehabilitation helps borrowers get their federal student loans out of default, and it requires a certain numb🐻er 🐟of consecutive, on-time payments on student loans under a rehabilitation agreement.

In the context of loan rehabilitation, a borrower’s discretionary income is based on the difference between their annual income and 150% of the poverty guideline for their family size and state of residence. From there꧅, the actual monthly payment made is based on the IDR plan utilized by the borrower.

Note that through Sept. 30, 2024, loan rehabilitation has been replaced with the Fres⛎h Start program. However, the same terms regarding discretionary income and getting on an IDR plan apply.

Strategies to Manage Discretionary Income 

While borrowers with federal student loans may not be able to help their income or family size, there are strategies they can use to manage their discretionary income and keep their sไtudent loan payments as low as possible.

Consider the following tips to reduce the burden of student d🀅ebt.

Choose the Best Income-Driven Repayment Plan

First, make su🍒re you select the right IDR plan for your needs—one that comes with the lowest possible monthly payment you can get and a repayment term that makes sense for your goals. 

Choosing the right IDR plan is important because loan amounts left at the end of these plans are ultimately forgiven. Thus, having the lowest possible monthly payment you can get is paramount, even if you have to 澳洲幸运5官方开奖结果体彩网:pay off student debt for 20 or 25 years. 

Budget for Student Loan Payments and Other Bills🔜

Start using a written monthly 澳洲幸运5官方开奖结💟果体彩网:budget to account for student loan payments, rent or mortgage payments, transportation costs, utilities, and o🧸ther expenses you may have. You could also look💧 into budgeting apps, which help you manage your income and bills on your smartphone.

Take Steps to 🍸Lower Your Adjusted Gross Income (AGI)

Also note that your "annual income" for the purpose of determining discretionary income is the adjusted gross income (AGI) listed when you file your taxes. You could potentially reduce your AGI through a range of different moves, including making contributions to a tax-advantaged retirement plan like a 401(k) or a 澳洲幸运5官方开奖结果体彩网:health savings account (HSA).

The Bottom Line

In the context of fe♌deral student loans, discretionary income is based on how much you earn each year and your family size, tax filing status, and state of residence. This metric is compared to the poverty guideline level and is used by the Department of Education to determine how much student debt you can afford to repay each month.