Discretionary Income: Why It Matters for Student Loans

Jon O'Donnell Updated on May 19, 2019

Although you may not know it, you probably make calculations about your discretionary income every day. From weighing the necessity of our next Amazon Prime purchase to considering the expense of eating out, most of us are conscious of how we spend the money that’s left over once we’ve got our bills covered.

But there’s another reason you should be mindful of your discretionary income: It’s an essential part of how monthly payments are calculated under income-driven federal student loan repayment plans. In this article, we’ll walk you through how the Department of Education sizes up your discretionary income and how their calculations translate to what you pay under a range of federal debt repayment programs. If you want to know how the government assesses your discretionary income to decide what you should be paying – pay attention.

money-2724248_1920-964536-edited.jpg

What is discretionary income?

Generally speaking, discretionary income refers to the money that’s left in your pocket after your taxes, necessities, and utilities are paid for. While you can’t choose to skip rent or food for a month, more flexible expenses (such as a vacation or movie tickets) are up to your discretion – hence the term applied to this pool of cash.

Of course, the Department of Education is pretty interested in how much money of that kind you have at your disposal. When you enroll in an income-driven repayment plan, the goal is to establish monthly payments you can consistently afford – without leaving you starving or homeless. That’s why your discretionary income is the basis for determining how much you’ll pay with an income-driven option: Theoretically, your student loan payments should come at the expense of luxuries, not necessities.

How could discretionary income affect my student loans?

As we mentioned above, discretionary income is relevant to borrowers who currently utilize an income-driven repayment plan or those who are considering doing so. These plans adjust your monthly payment to reflect your income, which can help borrowers who might struggle to make payments otherwise. Additionally, after a specified period of 20 or 25 years of consistent repayment, the remaining balance of your loan can be forgiven. These plans may extend the length of time you’re repaying your loan, however, translating into higher interest paid overall.

You’re only eligible for an income-driven plan if it will actually lower your monthly payments – otherwise, you’ll remain on a standard repayment plan instead. So how does the government determine how much you should pay relative to what you make?

In basic terms, the Department of Education sets your monthly payment as a percentage of your discretionary income. But they can’t conduct a detailed investigation of your basic needs and nonessential expenses to customize your payments to your lifestyle. Instead, they use a specific calculation to assess every borrower’s discretionary income more simply. We’ll explain that calculation in more detail below.

How is my discretionary income calculated?

The Department of Education uses a single standard to assess discretionary income: your annual income minus 150% of the federal poverty guideline for your family size.

That might sound like a lot of jargon, but we promise finding your discretionary income is as simple as completing these steps: 

How to Calculate Your Discretionary Income

Step 1

Find your annual income (after taxes have been withheld)

Step 2 Find the poverty guideline for your family size using this website
Step 3 Multiply the poverty guideline for your family size by 1.5
Step 4 Subtract that total (poverty guideline for your family size times 1.5) from your annual income 

 
You may notice a key shortcoming in this method of calculating discretionary income: Other than Hawaii and Alaska, every state’s guideline is the same, despite significant differences in the cost of living. Unfortunately, that’s just a bad break for residents of costlier states.

Now that you understand how your discretionary income is calculated, it’s time to learn how this figure translates to monthly payments you’ll really make under an income-driven repayment plan. Thankfully, your payment is set at a small percentage of your discretionary income – the government won’t demand all of it each month. 

New call-to-action

How is my monthly payment calculated using my discretionary income?

Before going further, let’s clear one thing up: With income-driven repayment plans, your total loan balance doesn’t influence how much you’ll pay each month. This makes sense (after all, these programs are designed to reflect what you can afford, not what you owe) but can seem counter intuitive to some borrowers. With other loans, the principal owed dictates the size of monthly payments, regardless whether you can afford them.

Conversely, your monthly payment for income-driven plans is a percentage of your discretionary income, which we showed you how to calculate above. Here’s what that percentage is for each of the major income-based repayment plans offered through the Department of Education.

The Major Income-Based Repayment Plans

Plan Percentage of Discretionary Income Required for Payments Description
Pay As You Earn (PAYE) 10% of discretionary income This program is available for all federal loans issued directly to students, and any remaining balance is forgiven after 20 years of consistent payments at this rate.
Revised Pay As You Earn (REPAYE) 10% of discretionary income This program applies the PAYE standard to older loans as well, so borrowers who took on debt before that program’s inception can enjoy the same rate. The only distinction is the period of payments required before forgiveness of graduate school loans. Unlike with the PAYE program, graduate school debt requires 25 years of payments before the remaining balance is waived.
Income-Based Repayment (IBR) 10% or 15% of discretionary income This program predates both PAYE and REPAYE – and borrowers who took out IBR loans before July 2014 will pay the price: 15% of their discretionary income and no forgiveness for 25 years. Those with IBR loans after that date will pay 10% and be eligible for forgiveness after 20 years of payments, basically the same terms PAYE and REPAYE offer. If you’re stuck at the higher rate currently, consider switching your loans over to a REPAYE plan instead for lower monthly payments.
Income-Contingent Repayment (ICR) 20% of discretionary income ICR’s rate is higher than any other program, and forgiveness kicks in after 25 years. Accordingly, it’s only desirable for those who are willing to pay more every month in the hopes of paying less in interest over time. A limited segment of borrowers will be comfortable paying 20% of their discretionary income but not their standard repayment rate, however.
 

While you could easily calculate your payments as a percentage of discretionary income with each plan, you don’t need to. The Department of Education offers a handy Repayment Estimator tool to assess how much your income-driven payments could be under each plan.

The tool incorporates some useful assumptions (such as anticipating your income will grow over time and, thus, projecting higher income-driven payments in the long run). Additionally, it will tell you if income-driven plans will help you pay less each month. If they won’t, you won’t qualify for an income-driven program anyway.

A Different Path to Better Payments

While discretionary income is a crucial element of some borrowers’ repayment strategies, it won’t be particularly relevant for others. Perhaps you’re looking for lower monthly payments or a better interest rate, but you make enough that you’re ineligible for income-driven plans. If that is the case, even more advantageous options may be available to you.

For those with strong credit and earnings, student debt refinancing can translate to enormous savings over the life of the loans. By securing better terms with a private lender, borrowers can keep hundreds of dollars in their pockets (an average of $259 monthly).

To learn more about the benefits of refinancing and other strategies to effectively manage student debt, explore all of Nitro's resources on the subject. We’re here to help you make the most of your investment in your education and save thousands of dollars in payments along the way.

Published in: Student Loan Debt

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell

Refinance and Save Today With These Lenders

#1 - Comet Recommended View More Details

Works with 275+ not-for-profit community lenders for higher approval chances

  • APR: 2.49% - 7.50%
  • Minimum credit score: 660
  • Refinance up to $300K
View More Details
Visit LendKey View Loan Disclosure

LendKey operates student loan programs for over 275 not-for-profit and community lenders across the country. By partnering with these lenders, LendKey is able to give consumers direct access to the best rates available from the most borrower friendly institutions. As the servicer of all loans obtained through its platform, you can rest easy knowing your personal information will be safe and that the best customer service team will be ready to answer your questions from application until your final payment.

LendKey Student Loan Refinance review

  • Lightning fast rate check - 2-minute rate check with no impact on your credit score
  • More lenders, more options - see the best offers from over 275 not-for-profit and community lenders for higher approval chances
  • Life of loan relationship - With LendKey, your personal information will never be sent or passed on to third parties. Their customer service team is with you from the moment you land on their website until you've completely repaid your loan.
  • Unmatched benefits- Community lenders put people over profits and offer unique benefits like cosigner release after 12 on-time payments, interest only repayment options to keep monthly payments low, the largest unemployment protection period in the market, and more.

Get a personalized quote from LendKey now.

#2 View More Details

Offers unemployment protection and career/coaching/networking

  • APR: 2.490% - 8.074%
  • Minimum credit score: 650
  • Refinance up to 100% of student debt
View More Details
Visit SoFi View Loan Disclosure

SoFi, which stands for “Social Finance,” was created by a group of Stanford business students who found themselves with a mountain of debt after graduation. They set out to change the student loan industry and help borrowers like themselves to get lower interest rates. SoFi has some of the lowest interest rates and, unlike the other lenders we reviewed, it has no maximum amount you can finance. However, Nevada residents can’t currently refinance with SoFi. Minimum loan balances are higher in Arizona, Massachusetts and Pennsylvania due to state laws. Additional state restrictions may apply.

SoFi Student Loan Refinancing Review

  • Low interest rates - For well-qualified borrowers, SoFi offers some of the lowest rates we have found.
  • Strong customer service - It has more than 350 customer service reps available to help applicants through process.
  • Career coaching and networking - Perks include career services representatives who can help you find a job or negotiate a higher salary. SoFi also hosts networking events, happy hours and educational lectures on topics like buying a home in major cities around the country.
  • Unemployment protection - Borrowers who lose their jobs through no fault of their own may apply for Unemployment Protection. If approved, SoFi will suspend their monthly SoFi loan payments and provide job placement assistance during the forbearance period. These benefits are offered in three month increments, and are capped at 12 months, in aggregate, over the life of the loan. Note that interest will still accrue while loans are in forbearance.

Find out what interest rate SoFi can offer you here.

#3 View More Details

For every loan they fund, they contribute to the education of a child in need

  • APR: 2.48% - 6.25%
  • Minimum credit score: 660
  • Refinance up to $500K
View More Details
Visit CommonBond View Loan Disclosure

CommonBond was founded in 2011 by three MBA graduates from the University of Pennsylvania’s Wharton School who wanted to help their peers escape from high-interest student loan debt. Its original focus was on grad students, but it has since expanded to cover undergrads as well.

Of all the companies we reviewed, CommonBond has some of the best customer service. The company prides itself on being easy to reach by email, phone, or live chat. It offers networking events, expert panels, insider newsletters, and even has a program help borrowers who lose their jobs to find new ones. CommonBond also makes you feel good about choosing to refinance with them by donating money to an education nonprofit for each loan they write.

CommonBond Student Loan Refinance review

  • Unemployment protections - If you lose your job or decide to go back to school, you can delay your payments for up to 24 months.
  • Social promise - For every loan they fund, they also contribute to the education of a child in need.
  • Hybrid loan option - Offerings include a 10-year hybrid loan with fixed interest for the first five years, and variable interest for the final five.
  • Referral bonus - For every friend you refer who refinances their loans with CommonBond, you’ll earn a $200 cash bonus.
  • Qualification - Borrowers must have graduated at least 2 years prior if they want to apply without a co-signer. And borrowers in 6 states – Idaho, Louisiana, Mississippi, Nevada, South Dakota, and Vermont – cannot currently refinance through CommonBond.

Get a personalized review of your refinancing options with CommonBond today.

#4 View More Details

Earnest empowers people with the financial captial they need to live better lives.

  • APR: 2.49% - 7.89%
  • Minimum credit score: 650
  • Refinance up to $500K
View More Details
Visit Earnest View Loan Disclosure

Using technology, data, and design to build affordable products, Earnest's lending products are built for a new generation seeking to reach life's milestones. The company understands every applicant's unique financial story to offer the lowest possible rates and radically flexible loan options for living life.

  • Commitment-free 2 minute rate check
  • Client Happiness can be reached via in app messaging, email, and phone 
  • No fees for origination, prepayment, or loan disbursement
  • Flexible terms let you pick your exact monthly payment or switch between fixed and variable rates
  • Skip a payment and make it up later
  • Online dashboard is designed to make it easy to apply for and manage your loan

Click here to apply with Earnest and to see how much you can save.

#5 View More Details

Operates in all 50 states; 2nd largest student loan refinancing lender

  • APR: 2.50% - 7.02%
  • Minimum credit score: 660
  • No refinancing amount maximum
View More Details
Visit Laurel Road View Loan Disclosure

Laurel Road is a national online lender with customers in all 50 states, the District of Columbia, and Puerto Rico. Many of our non-bank competitors are not able to lend in all 50 states.Laurel Road has grown to be the second largest player in the student loan refinancing space in large part because of our reputation as the go-to low rate provider.

Laurel Road Student Loan Refinance Review

  • National reach - Online lender that is available in all 50 US states, the District of Columbia and Puerto Rico.
  • No fees & the lowest rates in the space - Laurel Road is the most transparent about the rates they provide customers, and offer the lowest rates where it counts. Our customers will save more than $20,000 over the life of their loans on average. 
  • Customer service reputation - Laurel Road's customer service representatives are no rookies. With 19 years of experience on average, Laurel Road’s Customer Service team delivers an experience that is best in the industry. They work to build meaningful, life-long relationships with our valued customers to improve their overall financial wellness.
  • The stability & security of a bank - They are a division of Darien Rowayton Bank, a stable and secure FDIC-insured bank, regulated by the FDIC and the Connecticut Department of Banking.

Get your personalized, pre-approved rates in less than 5 minutes.

#6 View More Details

Special offers for medical resident and fellow refinance products

  • APR: 3.10% - 7.84%
  • Minimum credit score: 670 w/cosigner
  • Refinance up to $350K
View More Details
Visit Splash View Loan Disclosure

Splash Financial is a leader in student loan refinancing with new rates as low as 3.25% fixed APR which can save you tens of thousands of dollars over the life of your loans. No application or origination fees and no prepayment penalties. Splash Financial is in all 50 states and is intensely focused on customer service. Splash Financial is also one of the few companies that offers a great medical resident and fellow refinance product. You can check your rate with Splash in just minutes.

  • Low interest rates – especially for graduate students
  • No application or origination fees. No prepayment penalties.
  • Co-signer release program - you can apply for a cosigner release form your loan after 12 months of on-time payments
  • Specialty product for doctors in training with low monthly payment

Click here to see more of Splash's offerings and to see how you can save money.

Comments

I reduced my student loan payment by $152 per month, by refinancing thru Nitro:

Save Money Now