Find Out What Discretionary Income Is for Student Loan Repayment

Discretionary income

Your discretionary income plays a huge role in your student loan repayments. So when federal loan payments are too much for you to keep up with, an IDR plan may be possible. 

An IDR plan restricts the amount of money you have to pay toward student loans each month to a specific percentage of your monthly income. 

When it comes to your monthly student loan payment, the amount of money left over after paying for necessities — your discretionary income — might play a role.

This guide will help you determine how much money you have each month. And how you can put this money toward your student loan payments, including other perks to look out for. 

Let’s begin. 

What Is Discretionary Income For Student Loan Repayment

Discretionary income is the remaining income after paying for fundamental necessities. 

For income-driven repayment, the government considers your state’s federal poverty requirements. That determines how much of your disposable income you can afford each month to pay toward your student loan debt.

Differences Between Disposable Income And Discretionary Income 

Gross income minus state, federal, and other withholding taxes equals disposable income. It’s the remaining money after taxes for both non-essentials and necessities.

Typically, discretionary income is what remains after taxes and essential costs have been paid. 

On the other hand, your disposable income is the difference between the percentage of the poverty threshold for your family size and annual income and the state where you live for IDR programs.

Examples of necessary expenses include: 

  • Food
  • Transportation 
  • Housing such as rent or mortgage 
  • Healthcare expenses 
  • Necessary clothing 
  • Child care expenses 
  • Insurance

The Discretionary Income Determines Your IDR Payments 

Discretionary income

You must evaluate your disposable income to assess your monthly payments under an IDR plan. You’ll need to know the poverty guidelines and your annual income that apply to you to do so. 

The criteria are defined by the U.S. Department of Health and Human Services. And they are also dependent on the state of residence and the number of members in a family.

Your federal loans monthly payment on an IDR plan will be a proportion of your discretionary income.

What Are The Poverty Guidelines? 

Every year, the government publishes poverty guidelines for the 48 states and Alaska and Hawaii separately. However, because the cost of living in Alaska and Hawaii is higher, their guidelines are more personalized. 

The guideline is generated using the most recent census data for annual revisions and then adjusted for inflation using the annual Consumer Price Index (CPI). The poverty line is not meant to be a cost of living figure. Instead, it’s the income used to determine whether or not someone is poor. 

The Purpose Of Discretionary Income 

For federal borrowers, income-driven repayment programs are an option. These plans adjust your payments based on your actual earnings. And you’ll pay that amount over a 20 to 25-year period. 

In most IDR plans, your payment is calculated as a percentage of your disposable income, usually 10% or 15%. These arrangements are intended to alleviate your financial burdens and make sure you can comfortably make the monthly payments.

Further Details Of Discretionary Income For Student Loans 

The discretionary income works a bit differently for IDR plans and federal loans. The U.S. Education Department considers the disposable income to be the gross after-tax yearly income minus 150 percent of the poverty levels for the state and your family size. 

Two terms are used to describe an individual’s net after-tax earnings: net after-tax income (VBI) and adjusted gross income (AGI).

For the most part, your loan servicer will determine your discretionary income as the difference between 150 percent of the federal poverty level and your annual income.

How To Calculate Discretionary Income For Student Loan Repayment 

If you owe a lot of money on your student loans, the federal government has developed a strategy to help you pay them off more easily.

Because they don’t require repayments from any of your total wages up to the poverty criteria, they make repayments affordable. This is a necessary and non-discretionary expenditure on your part.

IDR programs ask for 10% to 20% of your discretionary income as a down payment to make them more affordable.

The Government Can Complete The computations For You

Don’t freak out if math isn’t your strong suit. To save you time, the government will ask for details about your income when you apply for an IDR plan and complete the computations for you.

However, it’s better to understand how disposable income works and how to calculate it. That will help you estimate your new payments.

The U.S. Education Department’s student Loan Simulator can also help you figure out how much you’ll owe before enrolling in an IDR plan. Then, of course, you can use another student loan discretionary income calculator to find out. 

Example Of How To Calculate Discretionary Income For Student Loan Repayment 

Discretionary income

Assume you’re a New Yorker making $50,000 per year. New York’s federal poverty guidelines are $12,880 multiplied by 150 percent, resulting in a monthly income of $19,320. You’ll have $30,680 left over after subtracting $19,320 from $50,000.

If you’re choosing an income-driven repayment plan, you’ll pay a different percentage of your monthly gross income. It’ll cost you around $3,068 each year or $256 a month to pay down your student loans if you use PAYE, which imposes a 10% fee on your disposable income.

As said earlier, you can also use the loan simulator provided by the U.S. Department of Education. Using your details, the simulator will estimate your monthly payments under each available payment plan. 

After that, you can choose to alter your repayment strategy or continue with the default one.

Let’s see how other IDR plans work: 

REPAYE 

As with the PAYE Plan, you’ll have to pay 10 percent of your discretionary income under the REPAYE plan. This plan, however, doesn’t limit your monthly payment to the amount you would pay on the standard repayment plan. 

Your monthly payment on the standard repayment plan may increase if your income rises. For example, let’s say your monthly discretionary income is $850 in the first year of your repayment plan. 

The standard repayment plan requires a monthly payment of $100. However, you qualify for REPAYE, which reduces your payment to $85. Your monthly discretionary income increases to $1,700 in the second year of your student loan. 

Your new REPAYE monthly payment is $170, which is 10% of your disposable income and $70 higher than the amount you owe under the standard repayment plan.

IBR Plan 

If you just took out student loans, the loan repayment for each month will be 10 percent on an IBR plan. And that’s because you’re a new borrower with no previous outstanding balance. 

If you’re not a first-time borrower, your payment will be 15% of your monthly discretionary income.

For instance, suppose you have $900 in monthly disposable income and no outstanding federal debts when you take out your current loan. An IBR plan would cost you $90in monthly student loan payments.

ICR Plan 

If you’re on the ICR plan, you’ll have to choose between the following options:

  • Adjusted for your income, the amount you’d pay with a 12-year fixed-payment loan.
  • 20% of your take-home pay

The only IDR plan for parent borrowers consolidating their PLUS or Direct Loans into a Direct Consolidation Loan is the ICR plan.

If your monthly disposable income is $880, your monthly payment under a 12-year repayment plan will be $200. That’s approximately 23 percent of your discretionary income. On the other hand, you’ll pay $176 monthly with an ICR Plan, which is less than 20 percent of your disposable income.

How Discretionary Income Impacts Your Loan Payments 

If you have a few hundred dollars in excess cash, don’t assume that all of it will be used to pay off your student loans. What happens is this: the government sets a cap on your payments based on a proportion of your discretionary income.

What you’ll pay for your discretionary income is between 10% and 20% toward your monthly loans if you choose an IDR plan. But, of course, if you don’t have a lot of spare cash, your monthly payment could be substantially smaller – and you might even be eligible for a zero payment.

Assume you signed up for REPAYE and had $890 in disposable income per month, based on the facts from the previous scenario. REPAYE limits your payments to 10% of your discretionary income, limiting your monthly payment to $89. 

If your loans are sizable, the massive reduction in monthly payments can result in significant savings.

While IDR plans can help you save money each month, they have certain drawbacks. For example, because your repayment period can be prolonged up to 25 years, you could pay a lot more interest throughout the loan. 

Before signing up for an IDR plan, be sure you know how much it’ll cost you. 

How Often Student Loan Discretionary Income Changes

Your discretionary income can vary in different situations.

At least once a year, your authorized disposable income is adjusted for student loan repayment purposes. So you must requalify and renew IDR programs every year due to this requirement from the U.S. Education Department.

The amount of money you have left over each month to pay off your student loans may increase or decrease depending on several factors.

What is Student Loan Discretionary Income Calculator 

The discretionary income calculator above has been fully updated with the government’s most recent poverty guidelines for 2022, which are published every January. 

You’ll see how much of your income will be used by the student loan servicers to calculate your income-based loan payments for each month.

If you have a lot of disposable cash, you should look into refinancing with a company to get a better interest rate

Now that you know about discretionary incomes, here’s what you can do about your student loans. 

What If You Don’t Qualify for an IDR Plan?

Discretionary income

Unfortunately, not everyone will be eligible for an IDR plan due to their loan type or income. However, if that’s the case, you can take advantage of various federal repayment programs that don’t rely on your disposable income.

Let’s go through them. 

Graduated Repayment. Your loan duration is ten years (up to 30 years for aggregated loans), and your monthly payments start modestly with a progressive repayment plan. After that, your payments increase yearly, no matter your income.

Extended Repayment. With extended repayment, you have a 25-year repayment period and can choose between fixed or progressive installments.

Other Alternatives To Pay Off Your Debts 

There are other ways to pay off your student loan debts if you don’t qualify for IDR Plans. Let’s go through some of them. 

1. Refinance Your Student Loans 

Refinancing is one of the most effective ways to clear off your student loans quickly. This may be a good option for you if interest rates have reduced since you took out your loan or your credit has significantly improved. 

It’s worth noting that refinancing is ideal if it allows you to pay off your debt faster. This can be accomplished by shortening the loan’s term, which you may be able to do simply due to your lower interest rate. 

Another way to achieve the same result is to keep the duration of your loan the same while lowering your monthly payments by using one of the strategies listed above to reduce the overall length of your loan.

2. Use Biweekly Payments To Pay Off Your Debt 

You can also pay off your debt faster by making payments every two weeks rather than monthly. Every year, you’ll be making the equivalent of one additional payment. You shouldn’t notice a significant shift in your monthly spending when paying off debt with biweekly payments. However, when you pay off the loan over time, you’ll save a lot of money because you’ll pay less interest.

3. Pay More Than The Minimum 

Paying more than the minimum payment on your monthly debt will help you pay it off faster and save money on interest. To pay off your loan faster, make extra payments regularly. 

Some lenders will allow you to make an additional monthly payment that will be applied to the principal. Check the terms of your loan before you start to see if there are any additional costs or penalties for early payback.

4. Make Additional Payments Each Year 

If bi-weekly payments sound daunting, but you prefer the notion of making an additional payment each year, you can achieve the same goal by making just one extra payment per year.

You’ll only feel the pinch once a year, but you’ll still cut the life of your debt by months, if not years. Make that once-a-year contribution with a work bonus, a tax return, or a windfall.

Spreading the payment out across the year is another simple option to make that extra payment. For example, divide your monthly payments by 12 and add that cost to your payments throughout the year. 

You’ll make a complete extra payment throughout the year without feeling the pinch.

5. Use Your Lender’s Programs To Clear Off Your Debt 

Numerous solutions may be available to your lender to assist you in reducing your debt more quickly. However, you should exercise caution because these programs may impose additional costs on you. 

Pay the costs if you think it’s worth it.

To avoid the fees, discover a way to pay more than you would otherwise. For example, your bank’s online bill pay system may allow you to set up automatic monthly payments. 

Remember to include a message that says, “Apply to the principal.”

In addition to your lender, several other companies are willing to accept fees for debt-payoff programs. In addition, software and systems that perform everything for you are available for purchase. 

If you have difficulty with discipline, you don’t need these services.

As long as it works for you, do whatever it takes to get the job done—but make sure you save more money than you spend.

Final Thoughts 

Your discretionary income will change as your income changes. When your family size increases, you’ll find a completely different amount of money to spend on yourself. Income-driven repayment plans may be a good option if you don’t make much money, as they could lower your student loan payments to zero. That said, if you need help, contact a student loan expert, and they’ll help you.