Your discretionary income is any income you have left over after paying important bills and expenses—like the taxes in your paycheck, rent/mortgage, food, and utilities. Anything non-essential (stuff you can live without) like your daily Starbucks or occasional entertainment or shopping trip are what make up your discretionary income.

Discretionary income is used by many student loan servicers and providers when calculating potential payment options like the income-based repayment plan. While repaying student loans can be difficult, loan services aren’t entirely out to get you—they get what they want from interest. So, they aren’t going to calculate a payment that you cannot afford.

How Discretionary Income Is Calculated:

What is considered non-necessary can differ from person to person. Afterall, you may not be able to function without your daily caffeine fix and your loan servicer may disagree. So, to avoid any issues, a standard method of calculating discretionary income is provided by the Education Department and is used identically across all federal student loan providers and servicers.

To calculate:

  • The federal poverty guideline is reviewed for the area where you live and what your family size is. This generates an income level that you “would” be considered below poverty at.
  • Once this number is identified, it is multiplied by 1.5.
  • Then the new total is subtracted from your adjusted gross income (your full income throughout the year; the amount you pay taxes on after any “adjustments”—remember your employers I-9 form? Those adjustments.).
  • The difference, if there is one, is used to base your payments off of.

But I Am BROKE and Have a HUGE Payment

If you have an unaffordable payment amount, you may want to contact us to help you calculate your discretionary income and help you enroll into a more affordable payment plan. It is possible you enrolled in the wrong type of repayment plan for your income level at the time your loan was first required to be repaid or you had a change in income since then, and never made the appropriate adjustment with your loan servicer.

It is true that for many individuals who don’t have much left over after paying their necessary bills for their required loan payment be $0.00. Yes, that means no payment is required—and no, not making a payment will not lead you into default. Afterall, if you are required to pay (at a minimum) only $0.00, and you pay $0.00, then you met your minimum payment requirement.

However, we do recommend trying to pay something, to help lessen the amount of interest that builds up in your loan balance.