Knowing what your discretionary income is (and how discretionary income is calculated for student loans) can help you make decisions about how to best repay your federal loans. That’s because the federal government typically uses discretionary income, which is any adjusted gross income (AGI) you have above a certain percentage of the federal poverty guideline, to determine your monthly payments for income-driven repayment (IDR) plans.
However, because of recent legislation, the options for income-driven plans — and the way monthly payments will be calculated — will be changing. For example, the new Repayment Assistance Plan (RAP) starting in July 2026 won’t use discretionary income to calculate payments. It instead looks at AGI, which could result in higher payments for some borrowers.
Here, we’ll discuss different IDR plans and the ins and outs of discretionary income, as well as upcoming changes to student loan repayment options, so you can figure out a repayment strategy that works for you and your budget.
Table of Contents
Key Points
• Discretionary income, calculated by subtracting a protected amount from adjusted gross income, is important for determining monthly student loan payments under current federal repayment plans.
• The IBR plan defines discretionary income as income above 150% 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?
The Department of Education (Ed Dept) calculates discretionary income as your adjusted gross income (AGI) in excess of a protected amount defined by a federal IDR plan.
Discretionary income under the Income-Based Repayment (IBR) Plan, for example, is any AGI you have above 150% of the federal poverty guideline appropriate to your family size. If you don’t qualify for a $0 monthly payment on the IBR Plan, your monthly payment is set to 10% or 15% of your discretionary income, depending on when you borrowed your loans.
Discretionary income as defined by the Ed Dept 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?
This is how federal student loan servicers may currently calculate your discretionary income on an income-based student loan repayment plan:
• Discretionary income under IBR is generally calculated by subtracting 150% of the federal poverty guideline from your AGI.
• Discretionary income under the Income-Contingent Repayment (ICR) Plan is generally calculated by subtracting 100% 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.
If you file separately, your student loan payments will be based on your income alone. However, you may lose some tax benefits, so you’ll have to weigh the pros and cons of this approach to determine which makes more sense for your finances.
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What Income-Driven Repayment Plan Are You Eligible For?
There are now three 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 Ed Dept offers the following IDR options for eligible federal student loan borrowers:
• Income-Based Repayment (IBR) Plan
• Pay As You Earn (PAYE) Plan
• Income-Contingent Repayment (ICR) Plan
All current IDR plans generally use discretionary income to determine monthly payments. 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 IDR plan are typically required to recertify their income and family size each year.
For the IBR and PAYE plans, eligibility is determined based on income and family size. As a general rule, to qualify, borrowers must not pay more under IBR or PAYE than they would under the 10-year Standard Repayment Plan. There’s no income requirement for the ICR plan.
Due to the recent legislation, borrowers who consolidated their Parent PLUS Loans into Direct Consolidation Loans are newly eligible for IBR if they enrolled in the ICR plan immediately.
Also because of the legislation, the PAYE and ICR plans will be eliminated in the coming years. For borrowers taking out their first loans on or after July 1, 2026, there will be only one income-driven plan: the Repayment Assistance Program. RAP will set borrowers’ payments at 1% to 10% of their AGI, rather than using discretionary income.
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 repayment plan is based on a 10-year repayment timeline. Current income-driven repayment plans can extend your payment timeline to up to 25 years. And the RAP plan to be introduced in 2026 extends the payment timeline to 30 years.
This means you’ll be paying off the loan longer and possibly paying more in interest over time. If you stay on the IBR plan, the government might forgive any remaining balance after 20 or 25 years of payments. On RAP, the amount may be forgiven after 30 years. But the amount that is forgiven on these plans may be taxed as income.
Navigating the changes to IDR plans can be complicated. PAYE and ICR are due to close by July 1, 2028, so you may have to switch to IBR or the new RAP plan in the next few years. And as noted above, for borrowers who take out loans after July 1, 2026, RAP will be the only income-driven option.
How to Apply for an IDR Plan
To apply for an IDR plan, you can go to StudentAid.gov and log into your account using your Federal Student Aid (FSA) ID. The online application is estimated to take no more than 10 minutes to complete. (If you prefer, you can download a paper application to fill out and then send it to your loan servicer.)
To fill out the application, you’ll need to supply your address, email address, and phone number, as well as information about your family size. You will also need to provide your most recent income tax return (a tool on the site can link your tax information to the application).
Once you complete the application you will see which IDR plans you qualify for. You can select one and then sign the form and submit it. Your loan servicer should send you an email or letter confirming receipt of the application. The servicer will notify you when your application has been processed.
How Does Discretionary Income Affect Student Loan Payments?
Income-driven repayment plans currently use your discretionary income to dictate the amount you’re required to repay each month. In the case of borrowers enrolled in the IBR Plan, payments are set at 10% of discretionary income for loans borrowed after July 1, 2014, and 15% for loans borrowed before that date. On the PAYE plan, payments are set at 10% of discretionary income. On ICR, payments are 20% of discretionary income.
Examples of Monthly Payment Calculations
To calculate your monthly payments on an IDR plan, you’ll need your adjusted gross income (plus your spouse’s if you file a joint return) and your family size, which includes the number of dependents you have, such as your children.
Next, find the federal poverty guideline for your family size and state, and multiply that number by 150%. Subtract this amount from your AGI to get your discretionary income. Your payment on IBR will be 10% of that amount.
Here’s an example:
Let’s say your AGI (plus your spouse’s) is $100,000.
Your family size is 3 (you, your spouse, and one child).
The federal poverty guideline for you is: $26,650.
Using that information, the calculation would look like this:
$26,650 x 1.50 (150%) = $39,975
$100,000 – $39,975 = $60,025
$60,025 x 0.10 (10%) = $600.25
Your payments on the IBR plan would be $600.25 per month.
To get an official payment amount, you can use the Federal Student Aid Loan Simulator to determine your payments.
Annual Recertification Requirements
IDR certification is typically required annually, and you’ll need to recertify your income and family size. This is mandatory even if there has been no change to your situation or income. If you fail to recertify, there may be negative consequences, such as higher monthly payments or even loss of eligibility for IBR.
You’ll be given a recertification deadline, and you’ll need to recertify by that date. As part of the process, you’ll include your family size as well as your most recent federal income tax return. You can recertify online.
If you gave the Ed Dept permission to access your federal tax information when you first applied for IDR, your yearly certification will be automatic. The Ed Dept will notify you about any change to your monthly payment amount.
How Else Can Borrowers Lower Their Student Loan Payment?
Besides IDR, there are other strategies borrowers can use to help lower their monthly student loan payments. These include:
Student Loan Refinancing
Borrowers may be able to reduce their student loan payments by refinancing student loans. With student loan refinancing, 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 credit and financial profile, refinancing could result in a lower interest rate or a lower monthly payment depending on which terms you choose. Just be aware that 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.
To find out how much you might be able to save with refinancing, try our student loan refi calculator.
Extended and Graduated Repayment Plans
Another option for current federal student loan borrowers is to consider the Extended Repayment Plan or the Graduated Repayment Plan to help lower their monthly payments.
To qualify for the Extended Repayment Plan, you must have more than $30,000 in outstanding Federal Direct Loans or Federal Family Education Loans (FFEL). Monthly payments on this plan are typically lower than payments of the standard 10-year repayment plan because borrowers have a longer period of time — up to 25 years — to pay them off. However, this means you’ll pay more in interest over the extended term.
Due to the recent legislation, the Extended Repayment Plan will be closed to new borrowers as of July 1, 2026. Current borrowers on the plan will continue to make payments on their extended term.
The Graduated Plan allows borrowers to pay off their loans over 10 years. Payments typically start out relatively low and increase gradually (usually every two years). The plan may be right for you if your income is low, but you expect it to rise.
The Graduated Repayment Plan is eligible to most current borrowers, however, the plan will be closed to new borrowers as of July 1, 2026. Borrowers currently on the plan can continue to make payments on the graduated timetable.
Applying for Deferment or Forbearance
You might also be able to qualify for a deferment or forbearance, allowing you to temporarily stop or reduce your federal student loan payments. Reasons you can currently apply for deferment include being in school, in the military, or unemployed. However, as part of the new domestic policy legislation, economic hardship and unemployment deferments will be eliminated for student loans made on or after July 1, 2027.
If you’re in deferment and you have certain federal loans, such as Direct Subsidized Loans, you typically won’t have to pay the interest that accrues during the deferment period.
You could apply for student loan forbearance if your federal student loan payments represent 20% or more of your gross monthly income, you’ve lost your job or seen your pay reduced, or you can’t pay because of medical bills, among other reasons. Note that interest accrues on your loans while they are in forbearance. As part of the new legislation, forbearance will be capped at nine months in any 24-month period beginning on July 1, 2027 for new borrowers.
The Takeaway
The government uses discretionary income to calculate your federal student loan monthly payments under a qualifying IDR plan. IBR and PAYE use a more generous formula to calculate discretionary income than ICR, and they offer lower monthly payments. Over the next few years, your IDR plan options will be whittled down to IBR and the new RAP plan, both of which use different income calculations.
If you’re not relying on income-driven repayment, you may want to consider the Graduated Repayment Plan or the Extended Repayment Plan to help lower your monthly payments, though those plans will be closing to new borrowers in the summer of 2026. Other options include deferment or forbearance or student loan refinancing.
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.
FAQ
How does discretionary income impact income-driven repayment plans?
Currently, income-driven repayment plans base your monthly payments on your discretionary income and family size. Typically, the higher your discretionary income, the higher your monthly student loan payments will be. For example, on the Income-Based Repayment (IBR) Plan, your discretionary income is the difference between your taxable income and 150% of the poverty guideline for your family size and state.
What percentage of discretionary income is used for student loans?
The percentage of discretionary income that’s used for student loan payments depends on the income-driven repayment plan a borrower is enrolled in. For instance, on the Income-Based Repayment (IBR) Plan, your discretionary income is the difference between your taxable income and 150% of the poverty guideline for your family size and state. On the Income Contingent Repayment (ICR) Plan, your discretionary income is the difference between your taxable income and 100% of the poverty guideline for your family size and state.
Can refinancing affect your discretionary income calculation?
Yes, but in an indirect way. Refinancing federal student loans makes you ineligible for income-driven repayment plans that base your payments on your discretionary income and family size. If you think you may want to apply for an IDR plan, refinancing is probably not right for you.
How do I find out my discretionary income for student loans?
To calculate your discretionary income for income-driven repayment plans, you’ll need your adjusted gross income (AGI) and your family size (you plus a spouse and any children, if applicable). Next, determine the federal poverty guideline for your family size and state (you can find this information on the Health and Human Services website) and multiply that number by 150% for the IBR plan or 100% for the ICR plan. Subtract the resulting amount from your AGI to get your discretionary income.
Is discretionary income the same as disposable income?
No, discretionary income and disposable income are not the same thing. Discretionary income as defined by the Department of Education under an income-driven repayment plan is any adjusted gross income you have above 150% or 100% (depending on the plan) of the federal poverty guideline appropriate to your family size. Disposable income, by comparison, is the amount of money you have available after income taxes have been deducted.
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