How Do Student Loans Calculate Discretionary Income?

Discretionary income for student loans is the difference between your adjusted gross income (AGI) and a percentage of the federal poverty guideline for your family size. Your loan servicer uses this number to set your monthly payment under an income-driven repayment (IDR) plan. It has nothing to do with what you spend — it’s a formula the Department of Education applies to your tax return.

The everyday definition of discretionary income — money left after paying for necessities — does not apply here. The Department of Education uses its own formula, and it’s the only one that matters for your IDR payment.

The formula: take your AGI (line 11 on your most recent Form 1040), then subtract a percentage of the federal poverty guideline for your family size and state. The result is your discretionary income. Your servicer takes a percentage of that number and divides it by 12 to get your monthly payment.

Your AGI is the starting input. Your discretionary income is what’s left after the poverty guideline buffer is subtracted. They are not the same number.

IBR and PAYE use 150% of the poverty guideline as the buffer. ICR uses 100%, which protects less income and produces a higher payment. The Repayment Assistance Plan (RAP), available July 1, 2026, abandons the discretionary income formula entirely. It applies a progressive bracket (1%–10%) directly to your full AGI with no poverty guideline buffer.

Disposable income is your take-home pay after income taxes. Discretionary income for student loans is a formula that subtracts a poverty-guideline-based threshold from your AGI. The two are unrelated. Your disposable income could be low because of rent, car payments, and medical bills, but if your AGI is high, your student loan discretionary income will still be high.

The formula is: (AGI − poverty guideline × multiplier) = discretionary income.

1. Find your AGI. This is line 11 on your most recent Form 1040. It is not the same as your gross income or your take-home pay. AGI is your gross income after above-the-line deductions.

2. Count your family size. Your family size includes you, your spouse if married, and any dependents you provide more than 50% support for — regardless of where they live.

3. Look up the poverty guideline. The Department of Health and Human Services publishes federal poverty guidelines every January. The guideline varies by family size and by state (Alaska and Hawaii have higher amounts).

4. Multiply the poverty guideline by the plan’s percentage. For IBR and PAYE, multiply by 150%. For ICR, multiply by 100%.
   Subtract. Your AGI minus the result from step 4 equals your discretionary income.

Worked example

Marcus is single with no dependents. He lives in Maryland. His AGI on his most recent tax return is $50,000. He is repaying his loans under IBR.

• 2026 poverty guideline for a family of one (48 contiguous states): $15,960

• 150% of poverty guideline: $15,960 × 1.5 = $23,940

• Discretionary income: $50,000 − $23,940 = $26,060

Marcus’s IBR payment depends on when he first borrowed:

• New borrower (first loan on or after July 1, 2014): 10% of discretionary income → $26,060 × 10% ÷ 12 = $217/month

• Not a new borrower (first loan before July 1, 2014): 15% of discretionary income → $26,060 × 15% ÷ 12 = $326/month

If Marcus’s AGI were at or below $23,940, his discretionary income would be zero, and his IBR payment would be $0/month.

Each plan takes a different percentage of your discretionary income:

• IBR (new borrower): 10% of discretionary income, divided by 12. Forgiveness after 20 years.

• IBR (not a new borrower): 15% of discretionary income, divided by 12. Forgiveness after 25 years.

• PAYE: 10% of discretionary income, divided by 12. Forgiveness after 20 years. Capped at the 10-year Standard Repayment amount.

• ICR: The lesser of 20% of discretionary income or a fixed 12-year payment adjusted for income. Forgiveness after 25 years. ICR uses 100% of the poverty guideline instead of 150%, which means less income is protected.

PAYE and ICR are being phased out under the One Big Beautiful Bill Act. After July 1, 2028, new enrollments will not be available. Borrowers already enrolled can stay in their current plan.

SAVE (which replaced REPAYE) was struck down by the 8th Circuit on March 10, 2026. It is no longer available. Borrowers previously enrolled in SAVE are in administrative forbearance while they transition to another plan.

The Federal Student Aid Loan Simulator can estimate your payment under each plan without doing the math by hand.

Your discretionary income recalculates every year when you complete your annual recertification. Three things can change it:

• Your AGI. A raise increases it. A job loss decreases it.

• Your family size. Adding a dependent lowers your discretionary income because the poverty guideline increases with family size.

• The poverty guideline itself. HHS updates the guideline each January based on inflation.

If you do not complete your annual recertification on time, your servicer may reset your payment to the 10-year Standard Repayment amount.

Some servicers are pulling tax data from the IRS months before a borrower’s recertification anniversary date, which can trigger unexpected payment increases. If your payment changed and you haven’t recertified yet, check with your servicer to confirm which tax year they used.

Related: Marriage and Student Loan Repayment

Your discretionary income starts with your AGI. If you reduce your AGI, your discretionary income drops — and so does your IDR payment. Strategies include increasing pre-tax retirement contributions, using an HSA, and filing taxes separately.

Related: How AGI Affects Your Student Loan Payment — and How to Lower It