Discretionary Income
What Is Discretionary Income?
Discretionary income is the portion of a borrower’s income used to calculate payments under federal income-driven student loan repayment plans.
For student loans, discretionary income is not simply leftover cash. It is a defined formula based on adjusted gross income and a percentage of the federal poverty guideline for the borrower’s household size and state.
Different repayment plans use different percentages when calculating discretionary income.
Why It Matters
Discretionary income:
- Determines monthly payments under IDR plans
- Adjusts annually based on income and family size
- Impacts eligibility for reduced payments and forgiveness
A lower discretionary income generally results in a lower required monthly payment.
Understanding how it is calculated helps borrowers anticipate payment changes.
How Discretionary Income Works
Discretionary income subtracts a multiple of the federal poverty guideline from adjusted gross income.
Example: If a borrower earns $45,000 and the protected poverty threshold for their household is $30,000, the remaining $15,000 may be considered discretionary income under certain formulas.
Repayment plans then apply a percentage, such as 5% or 10%, to determine monthly payment amounts.
Borrowers must recertify income annually.
Discretionary Income vs. Disposable Income
Discretionary Income → Defined formula for student loans
Disposable Income → General after-tax income
The terms are not interchangeable.
FAQs About Discretionary Income
Does it change every year?
Yes, it adjusts when income or family size changes.
Is it based on gross income?
It is typically based on adjusted gross income.
Do private loans use this formula?
Private lenders do not use federal discretionary income calculations.
Related Terms
