What is Discretionary Income?
When calculating discretionary income, always note. Discretionary income is how much money you have left after paying taxes and necessary expenses. For instance, like food and shelter. However, it doesn’t factor in money spent on some things. Things like:
- Also, on other non-essential purchases.
It is important you note this. Discretionary income matters for federal student loans. This is because the Education Department uses it to calculate payments for income-based repayment. Also, it is used to calculate other income-driven plans.
Furthermore, by accounting for your necessities, please note. It helps determine how much you could reasonably pay each month. Thus, if yours is low enough, your payment may be reduced to $0 a month.
How Discretionary Income Impact IBR
When calculating discretionary income, always note. It’s largely the same math as above. Instead of multiplying the left over amount after subtracting 150% of the federal poverty line by 10%, do this.
You can multiply by 15%. That’s because IBR is 15% of your income. And note. PAYE and REPAYE are 10% of income.
Why Calculating this Income is Important
When calculating discretionary income, always note. The federal government created income based repayment. This was because they want student loan payments to be affordable despite what you owe.
You may ask: How does government figure out what an affordable payment is? This is where the discretionary income definition comes in. Income based repayment programs like REPAYE, PAYE, IBR, and ICR take 10% to 20% of your ‘discretionary income’. That means the government needs a standardized formula to figure out what they are supposed to charge you.
You’ll never need to worry about what your student loan payments are going to look like ever again. This is once you know how to calculate your discretionary income,
Steps to Calculating Discretionary Income
There are 3 steps in the calculating discretionary income. They are:
Step 1: Look up the Federal Poverty Line (FPL) for your Family Size
When calculating discretionary income, consider this step. The Federal Poverty Line is the same for all of the lower 48 states. If you live in Alaska or Hawaii it’s a bit higher.
Here’s the list of federal poverty line values for the continental US in 2019. Family size 1 is $12,490. Also, Family size 2 is $16,910. Furthermore, family size 3 is $21,330. Additionally, family size 4 is $25,750. And, family size 5 is $30,170. Also, family size 6 is $34,590.
Additionally, family size 7 is $39,010. It may interest you to know that family size 8 is $43,430. And note. Each additional family member: add $4,420. The poverty line for a family of 4 back in 2018 was $25,100. Thus, if you were single with no children, then it would have been $12,140 in 2018. Take a moment to find the relevant number for your family size. And make a mental note of what it is in 2019.
Step 2: Multiply the Federal Poverty Line for Your Family Size by 150%
This is another step in calculating discretionary income. The discretionary income definition is similar. You get to deduct a certain amount of money from your adjusted gross income. This is before the government wants a percentage of it. Which is often under an income driven repayment program.
To learn how to calculate that deduction, p[lease note. Take the Federal Poverty Line number for your family size. Then multiply it by 1.5. That’s 150% of the poverty line.
Step 3: Take Your Adjusted Gross Income from the Previous Tax Year and Subtract the Deduction
When you follow the above step, the result is your Discretionary Income. Remember. Steps 1 and 2 give you the amount of income that the government won’t count in your student loan payment calculation. This is an important step when calculating discretionary income.
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Calculating Discretionary Income
Calculating discretionary income for student loans, the Education Department does this:
- Finds the correct federal poverty guideline for your location and family size.
- Also, multiplies that number by 1.5.
- Subtracts that number from your adjusted gross income.
Please note. Adjusted gross income is the amount you pay taxes on. You’ll find it on your most recent tax return on Line 37. That’s if you filed Form 1040; Line 21 on 1040A; or Line 4 on Form 1040-EZ.
Using this to Find Out Your Payment After Graduation
When calculating discretionary income, always note. Using the discretionary income, you first look up for the federal poverty line for family size of two. That is $16,240. Thus, now we multiple by 1.5 to get $24,360.
Furthermore, take $50,000 and subtract $24,360 to get $25,640. Additionally, multiply by 10% and divide by 12 to get a monthly payment of $213.67.
Calculating Discretionary Income and Student Loan Payment for the Future
You may ask: Can i know how much to pay in future using discretionary income calculations? The is yes. You can absolutely. First, you need to know that student loan servicers use prior years’ taxable income in the calculation.
As such, let’s say your re-certification date for IBR is coming up this September. You graduated in mid 2016 and have been paying $0 for the past year. Definitely, you should be worried what they’re going to ask you to pay come September.
For instance, you worked half the year and made $60,000. Take your adjusted gross income from 2016. And find the poverty line number for your family size. Also, multiply by 1.5. Furthermore, subtract that from your 2016 taxable income. Also, multiply the result by 10% and divide by 12. There it is. That’s what you’ll pay for student loans when your certify in September.
How it Affects Student Loan Payments Over Time
When calculating discretionary income, always note. Discretionary income changes every year. Thus, it is dependent upon certain factors like:
- Taxable income.
- Family size.
- And the government’s federal poverty line numbers.
It therefore means student loan payments change too. This happens every year under REPAYE/PAYE/IBR.