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Knowing what your discretionary income is (and how to calculate it) can help you make decisions about how to best repay your federal student loans. The U.S. Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount.

The “protected amount” is typically a percentage of the federal poverty guideline appropriate to your family size. The Saving on a Valuable Education (SAVE) Plan, for example, defines discretionary income as any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size.

When it comes to individuals who are considering repaying federal student loans with the SAVE Plan or the Income-Based Repayment (IBR) Plan, discretionary income can be a major factor in how much they’ll owe each month. That’s because the federal government typically uses a borrower’s discretionary income to determine their monthly payments.

Below we’ll discuss different IDR plans and the ins and outs of discretionary income, so you can figure out a repayment strategy that works for you and your budget.

What Is Discretionary Income?

As mentioned above, the Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount defined by a federal IDR plan.

Discretionary income under the SAVE Plan, for example, is any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size. You’ll have a $0 monthly payment under the SAVE Plan if your annual income doesn’t exceed the protected amount of $32,805 for a single borrower and $67,500 for a family of four in 2023.

If you don’t qualify for a $0 monthly payment on the SAVE Plan, your monthly payment beginning in July 2024 is set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Discretionary income as defined by the Education Department is different from disposable income, which is the amount of money you have available to spend or save after your income taxes have been deducted.

How Is Discretionary Income Calculated?

Here’s how federal student loan servicers may calculate your discretionary income:

•   Discretionary income under the SAVE Plan is generally calculated by subtracting 225% of the federal poverty guideline from your adjusted gross income (AGI).

•   Discretionary income under the Income-Based Repayment (IBR) Plan is generally calculated by subtracting 150% of the federal poverty guideline from your AGI.

If you’re filing jointly or you have dependents, that will impact your discretionary income calculations. For married couples filing together, your combined AGI is used when calculating discretionary income. Under an income-driven plan, filing with a spouse can drive up your income-driven monthly payments because of your combined AGI.

So, let’s say you’re in a one-person household and have a 2023 AGI of $40,000. If you are considering the SAVE Plan, you would subtract 225% of the 2023 poverty guideline ($32,805), to get an official discretionary income of $7,195. Monthly, that is a discretionary income of about $600, and your monthly payment beginning in July 2024 is set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Borrowers are generally expected to make required loan payments when due. The 2023 debt ceiling bill officially ended the three-year Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1, 2023, and payments to resume in October 2023.

💡 Quick Tip: Ready to refinance your student loan? You could save thousands.

What Income-Driven Repayment Plan are You Eligible For?

There are now two federal IDR plans that have different eligibility criteria and terms. (There are two others that are no longer accepting new enrollments.) These income-driven repayment plans can reduce monthly payments for people with incomes below a certain threshold.

It should be noted that federal IDR plans don’t apply to private student loans. They’re only an option for federal student loans.

Income-Driven Repayment Plans for Federal Student Loans

The federal Department of Education offers the following IDR options for eligible federal student loan borrowers:

•   Saving on a Valuable Education (SAVE) Plan

•   Income-Based Repayment (IBR) Plan

All IDR plans generally use discretionary income to determine monthly payments. So, if there is a change in a borrower’s income or family size, their monthly payment could increase or decrease, depending on the change. Borrowers enrolled in an income-driven repayment plan are typically required to recertify their income and family size each year.

The SAVE ICR plan is open to anyone with eligible federal loans. Under this repayment plan, the amount owed each month is always tied to a borrower’s discretionary income. This could mean that if an individual’s income increases over time, they may end up paying more each month than they would under the 10-year Standard Repayment Plan.

For the IBR plan, eligibility is determined based on income and family size. As a general rule, to qualify, borrowers must not pay more under IBR than they would under the 10-year Standard Repayment Plan. Under this plan, the amount owed each month will never exceed what a borrower would owe under the Standard Repayment Plan.

The PAYE and Income-Contingent plans stopped accepting new enrollments in July 2024.

Pros and Cons of Income-Driven Repayment Plans

IDR plans come with trade-offs. While they can lower your monthly payment and help free up your cash flow now, they may extend the life of your loan. The standard student loan payoff plan is based on a 10-year repayment timeline. An income-driven repayment plan can extend your payment timeline to up to 25 years.

This means you’ll be paying off the loan longer and possibly paying more in interest over time. If you stay on an income-driven repayment plan, the government might forgive any remaining balance after 20 or 25 years of payments — or as little as 10 years for SAVE Plan enrollees with original principal balances of less than $12,000. But the amount that is forgiven may be taxed as income.

How Does Discretionary Income Affect Student Loan Payments?

Income-driven repayment plans generally use your discretionary income to dictate the amount you’re required to repay each month. In the case of borrowers enrolled in the SAVE Plan, any required payments beginning in July 2024 are set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Recommended: How Is Income Based Repayment Calculated?

How Else Can Borrowers Lower Their Student Loan Payment?

Another potential way for borrowers to reduce their student loan payment is by refinancing student loans. When you refinance your student loans, you take out a new loan with new terms from a private lender. The new loan is used to pay off your existing student loans.

Depending on your financial profile, refinancing could result in a lower interest rate or a lower monthly payment depending on which terms you choose. You may pay more interest over the life of the loan if you refinance with an extended term.

Refinancing federal student loans with a private lender also forfeits your access to federal IDR plans, Public Service Loan Forgiveness, and Teacher Loan Forgiveness.

💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.

The Takeaway

The government uses discretionary income to calculate your federal student loan monthly payments under a qualifying IDR plan. The SAVE Plan may not provide the lowest monthly payment for eligible borrowers with high salaries.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Non-bank financial institutions provide financial services, but they don’t hold the same license or charter as a bank. Also referred to as non-bank financial companies or NBFCs, these entities can extend credit, provide investment services, cash checks, and exchange currencies. However, they generally can’t accept deposits from customers.

There are different types of non-bank financial institutions, and the way they’re structured can determine what services they provide. An NBFC can serve as a complement to traditional banking services or act as a competitor to licensed banks.

Here, you’ll learn more about these businesses, how they compare to banks, and their pros and cons.

What Are Non-Bank Financial Institutions?

Nonbanking financial institutions (NBFI) are institutions that don’t have a banking license but are able to facilitate certain types of financial services. They’re different from depository institutions, which can offer deposit accounts such as checking accounts, savings accounts, or money market accounts. An NBFI or NBFC is not licensed or equipped to accept deposits.

Non-bank financial institutions can specialize in niche financial services, including:

•   Investments

•   Financial consulting

•   Brokeraging

•   Money transfers

•   Check cashing

•   Risk pooling.

They can target a broad or narrow range of customers, which can include consumers, business owners, and corporate entities. Because they’re not licensed the same way that banks are, NBFCs are not subject to the same degree of government regulation and oversight.

How Do NBFCs Work?

Now that you know NBFCs’ meaning, consider how these institutions work. In general, NBFCs work by providing financial services that are outside the scope of what traditional banking typically entails. There are different types of organizations that can bear the NBFC (or NBFI) label. The type of organization can determine how it works and what services it offers.

Here are some of the most common types of NBFCs:

•   Investment companies

•   Loan companies

•   Companies that offer asset-based financing

•   Micro-lending companies

•   Risk pooling institutions.

In terms of regulation, NBFCs generally operate within the framework of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. However, the scope of regulation that extends to NBFCs and NBFIs is limited. For that reason, they’re sometimes referred to as “shadow banks” since they operate within the shadows of traditional banking institutions.

Pros and Cons of NBFCs

Non-bank financial institutions have both advantages and disadvantages. On one hand, they can play an important role in providing financial services outside the confines of traditional banking.

However, questions have been raised about the lack of oversight for NBFCs and what implications that might have for the individuals and businesses that use them.

Here are some of the main pros and cons of NBFCs at a glance.

Accountability is more of a question mark with non-bank financial companies since there’s less oversight overall. The increase in popularity of NBFCs has raised questions about the need for greater regulation of this section of the financial services industry.

Recommended: How to Switch Banks in 3 Easy Steps

NBFCs vs Banks vs Fintech

You may wonder how NBFCs and NBFIs compare to banks and fintech companies. Here are some points to consider:

•   Non-bank financial companies are not the same as banks, and they can also be differentiated from fintech. Again, a bank is a financial institution that holds a license or charter which allows it to accept deposits from its customers. Some banks may fall within the category of Community Development Financial Institutions (CDFIs), which help to promote access to capital and financial services in underserved areas.

•   Fintech or financial technology is a term that describes the use of innovation to improve financial services and products. Fintech generally encompasses tools, apps, and other tech that can make managing money or borrowing it easier. There can be some overlap between NBFCs and fintech or between fintech and banks.

Which is better, an NBFC vs. a bank vs. fintech? There is no single answer as each one can fulfill different needs. Comparing them side by side can make it easier to distinguish between them.

Examples of NBFCs

As mentioned, there are different types of NBFCs and NBFIs. If you’re looking for a specific non-banking financial institution example, the list may include:

•   Life insurance companies

•   Insurance companies that underwrite disability insurance policies

•   Property insurance companies

•   Mutual funds

•   Pension funds

•   Hedge funds

•   Financial advisors and investment advisors

•   Securities traders

•   Broker-dealers

•   Mortgage companies

•   Peer-to-peer lending companies

•   Payday lenders

•   Leasing or financing companies

•   Companies that provide money transfer services

•   Check cashing companies.

If you invest money, send money to friends and family via an app, or own a home, then chances are you’ve encountered an NBFC somewhere along the way. Examples of companies that may be classified as NBFC include LendingClub, Prosper, and Quicken Loans.

At the same time, you may also use traditional banking services if you have a checking account or savings account at a brick-and-mortar bank or an online bank.

NBFCs and the 2008 Financial Crash

The 2008 financial crash was fueled by a number of factors, including risky lending and investment practices. The resulting fallout included bank failures, banking bailouts, and a housing market crisis. Many of the companies that were engaging in these risky behaviors were NBFCs.

In 2010, the Dodd-Frank Act was passed to address some of the conditions that led to the crisis, including the lack of regulation and oversight as it pertained to NBFCs. The legislation made it possible for non-banking financial institutions to flourish, rather than whither away in the wake of the crisis.

Why? Simply because NBFCs continued to lend money at a time when traditional banks were placing greater restrictions on lending. While questions linger about the degree of regulation needed for NBFCs, their popularity has only increased since the financial crisis.

Recommended: Alternatives to Traditional Banking

The Takeaway

Non-bank financial institutions can play a part in how you manage your money. For some people, they may provide financial services that make their lives easier. However, they are not regulated in the same way that licensed or chartered banks are. Also, if you want to be able to deposit money into your checking or savings account, then you can do that through a bank.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How are NBFCs different banks?

NBFCs are different from banks because they do not hold a banking license or charter. While they can provide some of the same financial services as banks, they’re not equipped to accept deposits from customers.

What is the difference between fintech and NBFCs?

Fintech refers to the use of innovation and technology to improve financial products and expand access to financial services. An NBFC can use fintech in order to offer its products and services to its customers. For example, an investment company may offer robo-advisor services that operate on a fintech platform.

What are the disadvantages of NBFCs?

The main disadvantages of NBFCs include lack of government regulation and oversight, as well as their inability to offer deposit accounts. However, NBFCs can offer numerous advantages, including convenient access to credit and the potential to earn higher returns on investments.

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SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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