Discretionary income is a term that is used a lot in regards to student loans. It’s used when calculating student loan payments under all of the income driven repayment plans. It’s also something that changes annually based on certain factors both within and outside of the borrowers control. It is important to understand what is discretionary income, how it’s calculated, and how its applied to your student loan payments.
Discretionary Income Calculator
What exactly is discretionary Income?
Discretionary income is the amount of income remaining after deduction of taxes, other mandatory charges, and expenditures on necessary items. It’s essentially the income you have left over after paying all necessary and required living expenses. It does not account for personal items such as electronics, vacations, or various shopping someone might do. Discretionary income doesn’t include things like available credit limits or loans, it only looks at your actual income. For the purpose of student loans, discretionary income is your adjusted gross income on your tax returns subtracted by 150% of the poverty guideline for your family size.
What is the poverty guideline?
Every year the government releases a poverty guideline for the 48 contiguous states, and individually for the states of Alaska and Hawaii. Alaska and Hawaii have a higher cost of living so their guideline is individualized. The guideline is calculated by using the most recent census data and then adjusting for inflation against the annual Consumer Price Index (CPI) for annual updates. The poverty guideline is not supposed to be a cost of living. It’s literally the income that is considered to be living in poverty.
How to figure out your discretionary income
Your discretionary income is simply your adjusted gross income found on your most recent tax return(line 37 on form 1040) minus 150% of the poverty guideline for your family size. To calculate your discretionary income, you need to know a few things.
• Your adjusted gross income as reported on your taxes
• Your family size as reported on your taxes
• The poverty guideline for your state.
When you have all these, the calculation is easy. It’s simply your income subtracted by 150% of the poverty guideline for your state and family size. Here is a chart which shows the 150% poverty guideline for various family sizes
150% of the poverty guideline for 2017:
|Family Size||48 Contiguous||Alaska||Hawaii|
*For family member over 8, add $4,180 for the 48 contiguous, $5,230 for Alaska, and $4,810 for Hawaii
Now, using the table above we can see that depending on which state you live in, and how big your family size is, the poverty guideline will change. These numbers will slowly rise every year as the guideline is adjusted according to the CPI. This would mean that theoretically if your family size doesn’t change and your income doesn’t change, your student loan payment should be a bit smaller on an annual basis. We will discuss this in more detail a little bit further down the page.
Discretionary income based on family size and adjusted gross income (AGI) for the 48 contiguous states:
|Family Size||$30,000 AGI||$45,000 AGI||$60,000 AGI|
How discretionary income is connected to student loan payments
If you have federal student loans, you should know that there are multiple repayment plans available to most borrowers, many of which are calculated using your discretionary income. The goal of these repayment plans is to reduce the number of defaulted student loans and make payments more affordable. When the student loan payment takes into account a person’s income, family size, and necessary expenses, it’s a more customized payment depending on each individuals circumstance. To calculate your annual student loan payment in any of the income driven repayment plans, simply take your discretionary income and multiply it by the percentage used for your repayment payment plan. For example, if your discretionary income is $14,370, your annual payment in the REPAYE would be $1,437. Divide that by 12 to get your monthly payment or $119.75 in this case. If you were not in the REPAYE and in the IBR, we would use 15% of your discretionary income of $14,370 as a payment, which would equate to $2,155.50 annually or $179.63 per month.
Here is a table showing each repayment plan that takes into account discretionary income, and what percentage of that income is used to calculate the annual student loan payment
Discretionary Income Will Change Annually
Discretionary income can and will change annually, which is why all the income driven repayment plans require an annual recertification of your income. Discretionary income will change as the poverty guideline changes annually to adjust for the CPI, which will impact your payment. Also, as your income changes, so will your discretionary income. And lastly, when your family size changes your discretionary income will change. This confuses many borrowers when they unexpectedly have a new payment amount in the following year. It’s extremely important to remember to recertify your income annually or your servicer will place you into a standard repayment plan, likely increasing your payment as well as losing some forgiveness benefits.
Understanding the various terms in regards to your student loans is critical. Knowing how to calculate your discretionary income, and how it may change annually will allow you to know exactly what you should be paying on your student loans, as well as predicting future payments in upcoming years. If you know the repayment plan type you are in and what percentage of your discretionary income is used to calculate your payment, you should never be surprised by your student loan payment and make sure that no errors have occurred on the servicing side to cause you to pay more than you must be paying by law.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.