Let’s talk about discretionary income real quick. Basically, your discretionary income is the difference between your AGI, the poverty guidelines for your family size, and a multiplier of either 1.5 (REPAYE, PAYE, and IBR) or 1 (ICR).
Here’s what I mean:
Let’s say your AGI is $50 thousand, your family size is 4, you live in Texas, and you want to use the REPAYE plan. The poverty guidelines for a family size of 4 is $25,100.
So you take that number and multiply it by 1.5. That gives you $37,650.
Now that we have that number, we need to subtract it from your AGI ($50,000 less $37,650). That leaves a balance of $12,350. This is your discretionary income.
From there, each plan uses your discretionary income to calculate your monthly payment.
Here’s how that works:
REPAYE, PAYE, and New IBR. Each plan takes your discretionary income, multiplies it by 10%, and then divides that number by 12 to get your monthly payment. You’ll have the lowest monthly payment under these plans.
IBR. The income based repayment plan uses your multiplies your discretionary income by 15% and then divides that number by 12 to get your monthly payment. Unless you’re married, you likely should choose the REPAYE or PAYE plans over the IBR plan.
ICR. The income contingent repayment plan is different than the other plans in 2 ways. First, it uses a multiplier of 1 when calculating your discretionary income. Second, it multiplies your discretionary income by 20%. Both of those combine to give you the highest monthly payment of all the IDR plans. Choose this plan only if you have Parent Plus Loans.
Protip. You can avoid having to do the math yourself by using the Department of Education’s Repayment Estimator. Once you log in with your FSA ID, that tool will import your student loan information and your AGI so that it can calculate your estimated monthly payments under the income driven repayment plans.