Discretionary spending is the money left over after you pay for basic living expenses, and it determines how much you owe each month under income-driven repayment plans.
When you enroll in an income-driven plan — Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), or Income-Contingent Repayment (ICR) — the Department of Education calculates your monthly payment based on your discretionary income, not your total income. This is the key difference between income-driven plans and standard repayment.
The formula is straightforward: the government takes your Adjusted Gross Income (AGI) from your most recent tax return, subtracts 150% of the federal poverty line for your family size and state, and the result is your discretionary income. That number is then multiplied by a percentage (usually 10% to 20%, depending on which plan you choose) to arrive at your monthly payment. If your income is low enough that discretionary income comes out negative or zero, your payment is $0.
This matters because discretionary income is what actually gets you a lower payment — not income-driven plans themselves. A plan that uses discretionary income can give you a payment as low as $0 per month if you have little or no income above the poverty line. A plan that doesn't use it, like standard repayment, charges you a fixed amount regardless of income.
Key Takeaways
- Discretionary income is your AGI minus 150% of the federal poverty line for your family size and state, and this number determines your monthly payment on income-driven plans.
- If your discretionary income is zero or negative, your payment under an income-driven plan can be $0 per month, though interest still accrues on unsubsidized loans.
- The federal poverty line changes each year, so your discretionary income and payment can change even if your actual income stays the same.
- You must recertify your income each year to keep your payment accurate; if you don't, your payment reverts to a higher amount or standard repayment.
- Discretionary income is calculated the same way across all four income-driven plans, but the percentage applied to it (10% to 20%) varies by plan.
How the poverty line affects your payment
The federal poverty line is the threshold the government uses to define who needs income support. For 2024, the poverty line for a single person is roughly $15,000 per year; for a family of four, it's roughly $31,000. The Department of Education uses 150% of that line — so about $22,500 for a single person, $46,500 for a family of four — as the income floor before discretionary income kicks in.
This means if you earn $25,000 as a single person, your discretionary income is roughly $2,500 ($25,000 minus $22,500). On a PAYE plan at 10%, your payment would be about $21 per month. If you earn $20,000, your discretionary income is negative, and your payment is $0.
The poverty line is adjusted each year by the Department of Health and Human Services, usually in January. When it rises, the 150% threshold rises too, which can lower your discretionary income and your payment. When it stays flat, your discretionary income stays the same even if your salary increased slightly.
Why discretionary income matters more than your total income
On a standard 10-year repayment plan, your payment is based on your total loan balance divided by 120 months — your income doesn't factor in at all. On income-driven plans, your payment is based on discretionary income, which means you're only paying on the portion of your income that exceeds the poverty threshold.
This creates a real difference in affordability. A borrower earning $35,000 with $50,000 in loans might pay $500 per month on standard repayment. On PAYE, that same borrower's discretionary income might be only $12,500 (after subtracting the poverty threshold), so their payment would be around $104 per month. The loan takes longer to repay, but the monthly burden is manageable.
The trade-off is that interest continues to accrue on the unpaid balance. If your payment doesn't cover the interest each month, the unpaid interest capitalizes — it gets added to your principal, and you then owe interest on that interest. Over 20 or 25 years (the forgiveness timeline on most income-driven plans), this can mean you owe significantly more than you borrowed, even if your payment was low.
How to calculate your own discretionary income
You can estimate your discretionary income using your most recent tax return and the current federal poverty line. Start with your Adjusted Gross Income (AGI) — this is on line 11 of Form 1040. Then find the poverty line for your family size and state on the Department of Health and Human Services website, multiply it by 1.5, and subtract that from your AGI.
For example: AGI of $32,000, family of two, poverty line of $16,000. Multiply $16,000 by 1.5 to get $24,000. Subtract: $32,000 minus $24,000 equals $8,000 in discretionary income. On PAYE at 10%, your payment would be roughly $67 per month.
The Department of Education uses the same calculation when you submit your income information through the FAFSA or when you recertify your income each year. If you want to see what the government calculated for you, log into your account on StudentAid.gov and check your loan servicer's records.
Recertification and how discretionary income changes
Each year, you must recertify your income to stay on an income-driven plan. This means submitting proof of your current income — usually your most recent tax return or a recent pay stub — to your loan servicer. If you don't recertify, your payment automatically increases, often to the standard 10-year repayment amount.
When you recertify, the government recalculates your discretionary income using your new AGI and the current poverty line. If you got a raise, your discretionary income goes up and so does your payment. If you lost income or the poverty line increased, your discretionary income might go down and your payment shrinks. Some borrowers find their payment drops to $0 after a job loss or reduction in hours, even though they were paying $200 the year before.
The recertification deadline is usually in October or November, and your servicer will send you a notice. If you miss the deadline, you have a grace period to recertify without penalty, but your payment will be calculated under standard repayment rules in the meantime. After the grace period ends, your loans may go into default if you don't pay.
Discretionary income and loan forgiveness
On income-driven plans, any remaining balance is forgiven after 20 or 25 years of may have access to payments (the timeline depends on which plan you're on and when you took out your loans). Discretionary income affects how much you pay during those years, which in turn affects how much is left to forgive.
If your discretionary income stays low throughout the repayment period, you'll make smaller payments and a larger balance will remain at forgiveness. If your discretionary income grows as your career advances, you'll pay more and less will be forgiven. The forgiven amount is treated as taxable income in the year of forgiveness, which means you may owe federal income tax on it.
This is why discretionary income matters beyond just the monthly payment: it shapes your entire repayment trajectory and determines whether you'll owe taxes on forgiven debt years down the road.
Discretionary income across different income-driven plans
All four income-driven plans use the same discretionary income calculation — 150% of the poverty line subtracted from AGI. The difference is in the percentage of discretionary income you pay each month. PAYE and REPAYE use 10%; IBR uses 10% for new borrowers and 15% for borrowers who had loans before 2014; ICR uses 20%. The higher the percentage, the higher your payment, even though discretionary income is the same.
This means choosing between plans isn't just about discretionary income — it's also about which percentage works for your situation. A borrower with high discretionary income might prefer PAYE or REPAYE because 10% is lower than the 15% or 20% of other plans. A borrower with very low discretionary income might find the difference between plans doesn't matter much because their payment is already near $0.
Frequently Asked Questions
What happens to my payment if I get married?
If you file taxes jointly, your combined AGI is used to calculate discretionary income, which usually raises it and increases your payment. If you file separately, only your individual income counts, which can keep your discretionary income lower. Some married borrowers file separately specifically to lower their income-driven payment, though this has other tax consequences you should discuss with a tax professional.
Can discretionary income be negative?
Yes. If your AGI is below 150% of the poverty line, your discretionary income is negative or zero, and your payment is $0 per month. This happens often for borrowers with very low income, recent graduates, or those who experienced job loss. You still must recertify each year to maintain the $0 payment.
Does discretionary income include money from a spouse or parent?
No. Discretionary income is based on your AGI from your tax return, which is your individual income. Spousal income only counts if you file taxes jointly. Parent income does not count, even if you live with them or they help you financially.
What if my discretionary income changes mid-year?
Your payment is based on the income from your most recent tax return, so it doesn't change until you recertify the following year. If you lose your job in June, you'll still pay based on last year's income until you recertify in the fall. You can request an out-of-cycle recertification if your income drops significantly, and some servicers will adjust your payment sooner.
Is discretionary income the same as disposable income?
No. Discretionary income is what the Department of Education uses for student loans — AGI minus 150% of the poverty line. Disposable income is a term used in bankruptcy law and means income left after paying essential expenses like food and housing. They're calculated differently and used for different purposes.