Calculating Discretionary Income and How it Affects Your Student Loan

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:

• Entertainment.
• Shopping.
• 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.

Read Also: 

• The Pros and Cons of Working While in College
• What is a Work-Study Program?
• Federal Student Loans Guide
• Advantages and Disadvantages of Democracy

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.