In general, discretionary income refers to the money that you have left over after you pay for all of your necessary expenses, including taxes.
However, when it comes to many of student loan repayment programs offered by the student loan repayment programs offered by the federal government, there’s a more precise definition for discretionary income. This post will help you to understand how to calculate discretionary income and how it impacts the amount you’ll owe under income-driven repayment plans.
The formula is as follows:
DISCRETIONARY INCOME = ADJUSTED GROSS INCOME – (HOUSEHOLD POVERTY LEVEL * 1.5)
Now, let’s take a closer look.
ADJUSTED GROSS INCOME
Your Adjusted Gross Income (AGI) can be found on your tax return. If your income hasn’t changed much since you filed, you can use this number.
If you look back at your tax documents, Adjusted Gross Income can be found on Form 1040 (Line 37), Form 1040A (Line 21), or Form 1040EZ (Line 4).
If your income (or your spouse’s income) has changed significantly from the previous tax year, you’ll want to use your current income.
On your application for PAYE, REPAYE, or IBR, you’ll be asked to document any changes in income.
HOUSEHOLD POVERTY LEVEL
The household poverty level is determined by the U.S. Department of Health and Human Services.
The figures are the same for all 48 of contiguous states, but differ for Alaska and Hawaii. The poverty level does vary by household, depending on how many people live in a given household.
Once you’ve determined the poverty level for a household of your size in the state that you live in, multiple it by 1.5. Next, subtract this figure from your Adjusted Gross Income (or your current income) to arrive at your discretionary income. This is the figure that will be used to determine your payment obligation under the PAYE, REPAYE, IBR and ICR repayment plans.
DISCRETIONARY INCOME CALCULATOR
To make things easier, use our free discretionary income calculator.
RELEVANT LINKS:Household Poverty Guidelines Application for PAYE, REPAYE, and IBR