How Income Impacts Student Loans

Paying off student loans can be a challenge, especially when you factor in other recurring payments such as rent, electricity, food, and insurance. These additional expenses, also known as discretionary income, can impact your savings goals in a big way.

Luckily, your discretionary income may help you qualify for reduced student loan payments. By understanding discretionary income, you can better manage your budget and still enjoy what life has to offer. Read on to learn more about discretionary income, how to calculate it, and how to use this number to your advantage for student loan payments.

What Is Discretionary Income and How Can It Reduce Student Loan Payments?

While disposable income and discretionary income often get confused, these are two separate calculations. Discretionary income refers to the remaining funds you have after you pay for necessities and living expenses, like rent, food, and car insurance, whereas disposable income is the amount of money you take home after taxes before other expenses are factored in.

The smaller your discretionary income is, the less money you have each month for other spending, such as savings and debt repayment. This is why the Education Department uses your discretionary income amount to calculate payments for an income-driven repayment (IDR) plan and other repayment plans.

What Is Income-Driven Repayment?

Income-driven repayment (IDR) plans adjust your student loan repayments based on income, family size, and state. For example, if your state’s cost of living is high and you have a moderate income, you might be eligible for a reduced monthly payment.

There are several types of IDRs and each uses a different formula to determine how much you’ll pay. Based on your income and situation, like if you pay child support or attend school part-time, a certain plan might offer a lower repayment option. You can apply for an IDR to make your loan repayments and other expenses more manageable.

How to Calculate Discretionary Income for Income-Driven Repayment Plans

As a general rule, you can calculate your discretionary income by subtracting your living expenses from your after-tax income. If you’re calculating your discretionary income for student loan repayments, you’ll also need to factor in the poverty line of your state of residence.

The U.S. government calculates your discretionary income by calculating the difference between your annual income and 150% of the poverty guidelines for your family size and state of residence.

Here’s an example of Rita, who lives in Texas with her two children. She makes $40,000 a year. If the poverty line for a household of three is $30,000, she would multiply that by 1.5 (or 150%), equaling $45,000. With her income of $40,000, her discretionary income is $5,000.

The chart below shows the 2020 poverty guidelines for the 48 contiguous U.S. states and District of Columbia. If you reside in Hawaii or Alaska, you can find your poverty guidelines here.

2020 Poverty Guidelines Below is the U.S. Federal Poverty Guidelines. These are used to determine financial eligibility for certain federal programs.
Number of Persons in Household	Poverty Guideline
1	$12,760
2	$17,240
3	$21,720
4	$26,200
5	$30,680
6	$35,160
7	$39,640
8	$44,120
Source: U.S. Department of Health and Human Services *Data listed is for the 48 contiguous states and District of Columbia

When looking at the poverty line, remember that your annual income includes more than your base salary. You should include tips, commissions, side hustles, freelancing, social security, and retirement income. In other words, it’s the total amount of money you earn in a year — no matter the source.

Putting approximately 40% of your discretionary income toward paying off debts and savings is a good goal to aim for: if your discretionary income is $1,000, consider putting $400 toward your student loans and some investments.

How to Reduce Your Loan Payments

Once you’ve calculated your discretionary income to see if you qualify for a lower monthly loan payment, you’ll need to fill out an application for a repayment plan. Remember that in addition to your discretionary income, the amount you pay also depends on the length of time you repay the loan amount.

Our loan repayment calculator will show you the estimated monthly cost of your student loan repayments based on loan amount, terms, and annual interest rate.

Repaying your student loans can be difficult, especially as you balance your other expenses. An income-driven repayment plan based on your discretionary income might give you the relief you need. Overall, a budget can help you pay off debt and offer a guide for achieving your financial goals.

Federal Student Aid | Great Lakes Educational Loan Services | Investopedia