Editor's Note: The SAVE Plan is still in limbo after being blocked in federal court. SAVE enrollees are in interest-free forbearance until at least April 2025. Two closed repayment plans — Income-Contingent Repayment (ICR) and PayAs You Earn (PAYE) — are reopened to those who want to leave forbearance. We will update this page as information becomes available.
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.
Key Points
• Discretionary income, calculated by subtracting a protected amount from adjusted gross income, is crucial for determining monthly student loan payments under federal repayment plans.
• The SAVE Plan defines discretionary income as income above 225% of the federal poverty guideline, potentially allowing for $0 payments for borrowers under specific income thresholds.
• Income-driven repayment plans can lower monthly payments but may extend loan terms significantly, resulting in more interest paid over time compared to standard repayment options.
• Borrowers must recertify their income and family size annually, affecting their monthly payment amounts based on changes in financial circumstances.
• Refinancing student loans with private lenders can lower payments but forfeits access to federal benefits like income-driven repayment plans and potential loan forgiveness.
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.
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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.
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