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How Your Discretionary Earnings Impacts Your Pupil Loans

Repaying student loans can be challenging, especially if you consider other recurring payments such as rent, electricity, groceries, and insurance. These additional expenses, also known as discretionary income, can have a significant impact on your savings goals.

Fortunately, your discretionary income can help you qualify for reduced student loan payments. If you understand income at your own discretion, you can better manage your budget and still enjoy what life has to offer. Read on to find out more about what you can do at your own discretion, how to calculate it, and how to use this number to your advantage for student loan payments.

What is discretionary income and how can it reduce student loan payments?

While disposable income and discretionary income are often confused, these are two separate calculations. The discretionary income refers to the remaining funds that you have after paying for necessities and living expenses such as rent, food and car insurance, while the disposable income is the amount of money that you take home after taxes before other expenses are taken into account .

The lower your discretionary income, the less money you have each month for other expenses such as savings and debt repayment. For this reason, the education department uses your discretionary income amount to calculate payments for an income-based repayment plan (IDR) and other repayment plans.

What is income-related repayment?

Income-based repayment plans (IDRs) adjust student loan repayments based on income, family size, and state. For example, if your state's cost of living is high and you have a moderate income, you may be entitled to a reduced monthly payment.

There are different types of IDRs, and each uses a different formula to determine how much you pay. Depending on your income and your situation, e.g. For example, if you pay child support or go to school part-time, a specific plan may offer a lower repayment option. You can apply for an IDR to make it easier to repay your loan and other expenses.

Calculation of discretionary income for income-based repayment plans

discretionary income calculation

Typically, you can calculate your discretionary income by deducting your cost of living from your after-tax income. When calculating your discretionary income for repayment of student loans, you must also take into account the poverty line in your country of residence.

The U.S. government calculates your discretionary income by calculating the difference between your annual income and 150% of the poverty guidelines for your family size and place of residence.

Here is an example from Rita, who lives in Texas with her two children. She earns $ 40,000 a year. If the poverty line for a three-person household was $ 30,000, it would multiply that by 1.5 (or 150%), which equates to $ 45,000. With an income of $ 40,000, her discretionary income is $ 5,000.

The following graphic shows the poverty guidelines for 2020 for the 48 bordering US states and the District of Columbia. If you live in Hawaii or Alaska, you will find your poverty guidelines here.

Poverty guidelines 2020

Below are the U.S. Federal Poverty Guidelines. These are used to determine financial eligibility for certain federal programs.

Number of people in the household
Poverty directive
$ 12,760
$ 17,240
$ 21,720
$ 26,200
$ 30,680
$ 35,160
$ 39,640
$ 44,120
Source: U.S. Department of Health
* The data presented relates to the 48 adjacent states and the District of Columbia

When considering the poverty line, remember that your annual income is more than your basic salary. You should include tips, commissions, side jobs, freelance work, social security and retirement income. In other words, it's the total amount you earn in one year, regardless of the source.

A good goal is to spend about 40% of your discretionary income on debt and savings repayment: If your discretionary income is $ 1,000, you should consider spending $ 400 on your student loans and some investments.

How to reduce your loan payments

Once you've calculated your discretionary income to determine if you qualify for a lower monthly loan payment, you'll need to fill out a repayment plan application. Remember that the amount you pay in addition to your discretionary income also depends on how long you repay the loan amount.

Our loan repayment calculator shows you the estimated monthly cost of your student loan repayments based on the loan amount, terms and the annual interest rate.

Repayment of your student loans can be difficult, especially if you offset your other expenses. An income-based repayment plan based on your discretionary income can give you the relief you need. Overall, a budget can help you pay off debts and provide a guide to achieving your financial goals.


Federal Student Aid | Great Lakes Education Loan | Investopedia

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