//www.forbes.com/advisor/loans/best-private-student-loans/ “title =” Student loan “data-wpil-keyword-link =” linked “> Student loan payments – Forbes Advisor

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Your discretionary income is the money you have left after paying for basic necessities like rent, food, and clothing. It’s what you use when meeting friends for dinner, upgrading to the latest smartphone, or buying a new video game.

If you have student loan debt, you might not have a lot of discretionary income. If you have federal loans and can’t pay your current payments, sign up for a income-based repayment plan (IDR) can give you some relief and more wiggle room in your budget. With an IDR plan, your loan manager uses your discretionary income to calculate your monthly payments. Here is how it works.

What is discretionary income?

When it comes to student loans, discretionary income is treated a little differently from the standard definition. Instead of looking only at your personal income and expenses, the federal government and your loan manager will compare your income to federal poverty guideline for your location and the size of your family.

As of 2020, the following poverty guidelines apply to residents of the 48 contiguous states and the District of Columbia.

Student loan repayment plans that rely on discretionary income

If you are on a Standard 10-year repayment plan, you don’t have to worry about your discretionary income affecting your student loan payments; your payment is fixed, and it is determined by your interest rate and the repayment term. Any change in your income will not affect your monthly payments.

However, IDR plans are available for federal loan borrowers who are struggling to keep up with their payments. IDR plans determine your monthly payments based on your discretionary income. Depending on your income and the size of your family, you could significantly reduce your monthly payments by signing up for an IDR plan.

The way your discretionary income is determined varies depending on the IDR plan:

  • Income Based Refund (IBR). Your discretionary income is the difference between your annual income and 150% of the federal poverty guideline. If you took out a loan after July 1, 2014, your payment is 10% of your discretionary income, but it will never exceed your monthly payment under a standard 10-year repayment plan.
  • Income Based Reimbursement (ICR). Discretionary income for ICR is the difference between your annual income and 100% of the federal poverty guideline for your state and your family size. Your payment will be 20% of your discretionary income or a fixed payment with a term of 12 years, whichever is less.
  • Pay as you earn (PAYE): With PAYE, your discretionary income is the difference between your annual income and 150% of the federal poverty guideline for your state and your family size. Your monthly payment is 10% of your discretionary income, but it will never exceed your payments under a standard 10-year repayment plan.
  • Revision of remuneration as and when earnings (REPAYE): Your federal loan manager calculates your discretionary income by looking at the difference between your annual income and 150% of the federal poverty line. Under REFUND, your payment is 10% of your discretionary income.

How to calculate discretionary income

To calculate your discretionary income, compare your annual income to the federal poverty guideline for your state and corresponding family size. Your discretionary income is determined by subtracting a percentage of the federal poverty line from your annual income. The percentage depends on the IDR plan you choose.

Examples of payment

To show you how your discretionary income affects your payments, consider the following examples. For each we used a student loan balance of $ 30,000 at 4.53% interest. The borrower earns $ 35,000 per year, is married, has one child, and lives in the 48 contiguous states.

Standard repayment plan

Under a standard 10-year repayment plan, the borrower’s monthly payment would be $ 311 per month, which you can determine using a student loan calculator. Discretionary income does not play a role in determining the monthly payment.

IBR, PAID and REFUND

With IBR, PAYE and REPAYE, the loan manager calculates the borrower’s monthly payment by subtracting 150% of the federal poverty line from their income. Since the borrower has a three-person household, his guideline is $ 21,720 and 150% of the guideline is $ 32,580.

Their discretionary income is annual income – $ 35,000 – minus $ 32,580, which leaves them with $ 2,420. To calculate the monthly payment, the loan manager uses 10% of the discretionary income, and this number is divided by 12.

Under these three repayment plans, the borrower would pay $ 20.17 per month.

RIC

For the ICR, the loan manager uses 100% of the poverty guideline, or $ 21,720. By subtracting the poverty line from his annual income, the borrower finds that his discretionary income is $ 13,280. Under the ICR, their annual payment is 20% of their discretionary income, or $ 2,656. To find their monthly payment, they divide that number by 12. By signing up for the ICR, the borrower’s monthly payment would drop to $ 221.33.

Disposable income vs discretionary income

Although disposable income and discretionary income are often confused, they are very different from each other.

Your disposition income is the money you have left after paying your federal, state, and local taxes. You use your disposable income to cover your needs, such as accommodation and food, as well as any extras you buy.

Your discretionary income is what you have after paying your essential expenses. It’s what you use to pay for non-necessities, like entertainment.

What if I am not eligible for an IDR plan?

Unfortunately, not everyone will qualify for an IDR plan because of their income or loan type. If so, there are others federal repayment plans you can benefit from it don’t rely on your discretionary income:

  • Progressive reimbursement. Under a progressive repayment plan, the duration of your loan is 10 years (up to 30 years for consolidated loans) and your payments start low. Every two years, your payments increase, regardless of your income.
  • Extended repayment. With extended repayment, your repayment term is set at 25 years and you make fixed or step payments.

Use federal student aid Loan simulation tool to find the best repayment plan for you.

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