Discretionary Income and Student Loans

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  • Discretionary Income and Student Loans
Author: Joseph Reinke, CFA

When it comes to personal finance, discretionary income is the amount of money we have left over after we pay for our expenses.  However, discretionary income for student loans means something different.

When it comes to student loan forgiveness plans (a.k.a. income-driven repayment plans), the Federal government uses a calculation to make sure your monthly payment is affordable.  They have termed the result of this calculation “discretionary income.”  This article details the calculation.  This calculation is extremely important for IBR and PAYE plans.

Note: If you have not read our Student Loan Forgiveness Guide, I highly recommend reading that first before proceeding.


Table of Contents:

  1. Two Easy Ways To Calculate Discretionary Income For Student Loans
  2. Calculating Discretionary Income For Student Loans By Yourself
  3. What If I was A Student Last Year

Two Easy Ways To Calculate Discretionary Income For Student Loans

If you are just trying to get a ballpark estimation of what your monthly payment will be on a student loan forgiveness plan, then you can estimate it from your gross income.  Gross income is simply how much you make each year before any deductions.

We’ve helped thousands of new grads manage and eliminate over $1.7 billion in student loans.  Based off of the data we’ve collected from those using our IDR Tax Savings Solution, we typically see the required monthly payment be 6% – 8% of gross income.  For example, if you make $100,000 per year, then your student loan payments will be between $6,000 and $8000 for the year. This equates to monthly payments between $500 and $666.

The second easy way you can calculate discretionary income for student loans is to use our IDR calculator.  This will give you a more exact number and is based specifically on your situation. The tool is accessible through your free FitBUX membership.

P.S. I’m obviously biased but we built our student loan forgiveness tool to be better than all others…I think it’s awesome and hope you will too plus you can speak to expert student loan planners!

FitBUX's Income Driven Repayment Tax Savings Solution

Calculating Discretionary Income For Student Loans By Yourself

If you want to dive deeper into the calculation yourself, then use the the three steps below.  I highly recommend reading this section if you want to get familiar with the math. It’s beneficial because you can learn how to “optimize” the numbers to put yourself in a better situation. The math also allows you to have a further understanding of the risks of using student loan forgiveness plans.

Step 1: Federal poverty line for your family size

The government has developed a formula for determining a “Poverty Line.” The poverty line is the same in all states except Alaska and Hawaii.

Here is a link to the family poverty line (also called FPL for short).

For our example, let’s assume you are married with one child.  Your “poverty line” would be $21,960.  Take a note of your number and write it down.  We will be using it in Step 2 and Step 3.

Step 2: Multiply Your FPL by 150% or 225%

Just like taxes, you can deduct your FPL from your Adjusted Gross Income. I.e. you can reduce your discretionary income for student loan purposes.  The result is a lower required monthly payment for your student loans.

Using our earlier example of a family of three, we’d take $21,960 *1.5 = $32,940.

Under the new SAVE student loan repayment plan, the threshold increased to 225%.  Therefore, you would multiply the FPL by 2.25.

Step 3: Calculate Discretionary Income & Your Monthly Payment

The next step is to take your tax return from the previous year, let’s say you made $80,000. You would take $80,000 – $32,940 = $47,060.  This result ($47,060) is the figure used by the government, i.e. it is your discretionary income for student loan purposes.

Now take 10% of that (if you are on Old IBR then it’s 15%), divide by 12 and that is your monthly payment. For example, $47,060 *.10 = $4,706/12 = $392.17 per month.

What If I Was A Student Last Year

If you were a student last year and did not file taxes, then your required payment for the 1st year could be $0.

If you choose to use your pay stub to verify your income instead of tax returns, then the required monthly payment will be based on the pay stub you submitted.  The required payment is calculated in a similar manner as mentioned in the previous section.


If you made it through this article, congrats.  The math can be mind numbing which is why 88% of borrowers don’t know how these plans work. If you want to save time and a lot of money, sign-up for our IDR Tax Tracking Solution today. We’ll do all the heavy lifting for you so you can sleep better at night.

By Joseph Reinke, CFA, Founder of FitBUX

IDR Tax Savings Solution

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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