Why does discretionary income matter for student loans?

Discretionary income is something you will need to take into account when determining monthly federal student loan repayments.

Knowing what discretionary income is and how to calculate yours can help you find out the amount you will pay toward your federal student loans every month. After you figure out your discretionary income, you can compare your federal student loan payments to what they could be with a refinance and see which is best for you.

Learn more about a student loan refinance to help determine which is the best option for you.

What is discretionary income?

Discretionary income refers to the amount of post-tax income you have after paying for any necessary living expenses. Necessary expenses include housing, food, utilities, insurance, health care and minimum debt payments. Discretionary income is available for nonessential spending.

How does discretionary income affect student loan repayment?

For many federal student loan repayment programs, your repayment amount is based on your discretionary income.

Federal student loans use your discretionary income to make payments affordable for borrowers of all income levels. Borrowers with federal student loan repayment plans could expect to pay from 10% to 20% of their discretionary income monthly toward repayment.

How can I calculate discretionary income for student loans?

If you are looking to calculate your discretionary income to get an idea of what your payments might be, you will start by figuring out your adjusted gross income.

To figure out your adjusted gross income, or AGI, you will need to take all your taxable income for the year and remove IRS-allowed adjustments. This will be line 11 of your 1040 tax form. From your AGI, you will need to subtract a percentage of the federal poverty guideline you qualify for, based on state and household size. The amount you have left will be your discretionary income.

The percentage of the federal poverty guideline will depend on the student loan you have. For Income-Contingent Repayment, or ICR, plans, it is 100% of the federal poverty guideline. If you have an Income-Based Repayment, or IBR, or Pay As You Earn, or PAYE, plan, it will be 150% of the federal poverty guideline.

Does it matter if I was a student last year?

If you were a student last year, there is a chance your AGI could be lower than if you were working full-time.

Your AGI, which is used to determine your discretionary income, is pulled from your most recent tax return, which typically represents the previous year. This means that if you were a full-time student last year, there is a good chance that your AGI could be lower than if you were a full-time employee.

How can I learn more about student loan refinancing?

Student loan refinancing is a great opportunity that could potentially lead to lower monthly mortgage payments.

Refinancing your student loans will replace your current loan with a new one that better fits your current financial situation and current interest rates. You can also use a student loan refinance to consolidate multiple student loans into one. While refinancing could lead to lower monthly payments, it will remove any benefits can may come with your federal student loans.

If a student loan refinance feels like the right choice for you, begin an online application.

This student loan refinance marketplace is presented by Rate for marketing purposes only. When you click the button to “Continue” you are leaving Rate and entering the marketplace.  The marketplace is operated by FitBux, Inc., which facilitates connections to third-party Platform Partners (such as LendKey and Splash Financial) and their lending institutions, and may receive compensation when you complete a loan transaction. Rate and Fitbux are affiliated companies under common ownership. Clicking the “Continue” button you will be sharing your information with third party Platform Partners LendKey and Splash Financial, and agree to be subject to the terms of use and privacy policies posted by these third parties. Rate is not a lender, does not participate in credit decisions, and does not receive compensation in connection with any loan transaction.

Prequalified rates are informational only, do not constitute offers of credit, and are subject to change. Final rates may differ based on your credit profile and other factors. Lowest rates require highly creditworthy applicants and may require a cosigner. All credit decisions are made solely by lending institutions in their discretion. This platform does not represent all available loan options. Product availability varies by state. Not financial advice — consult a qualified advisor before refinancing.