Your minimum payment due under IDR plans is a percentage of your “Discretionary Income.” Discretionary Income is a specific measure used by the federal government, defined as your taxable income less 150 percent of the poverty level as determined by the U.S. Department of Health and Human Services (HHS). Written as a formula:
Discretionary Income = Your Taxable Income – (150% × HHS federal poverty guidelines)
Two inputs determine your Discretionary Income:
1. Your Taxable Income, reported through:
a. The Adjusted Gross Income (AGI) from your most recently filed tax return (within last two years); or
b. Alternative documentation of income (ADOI) via a pay stub, W-2, or something similar to estimate yearly taxable income
2. The annual HHS Poverty Guideline for your family size and state of residence (http://aspe.hhs.gov/poverty)
a. Family size generally counts your spouse plus any other children/family members for whom you provide a majority of financial assistance, including unborn children due to arrive during the repayment period.
b. As your family size increases, your discretionary income may decrease, thus your minimum monthly amount may decrease under and IDR. Renew your income and family size when it changes!
Your Taxable Income
Documenting your taxable income is both an art and a science. It will depend on the documentation you have available at the time of application and whether or not that information matches your current income and family situation. If you use an AGI, it must be from the most recent two tax return years. Alternative documentation of income (pay stub, offer letter, W-2) can be no more than 90 days old. Choose the documentation that is the most reasonable representation of your current taxable income situation and meets the income-driven repayment requirements.
Currently, the easiest way to certify your income for IDR is electronically via studentaid.gov using the IRS data retrieval tool. This will automatically send your AGI from your most recent tax return to your loan servicer(s) and should reduce the amount of time and effort required to apply. Your AGI is often lower than your gross taxable income due to adjustments and accounting for non-taxable income like 401k contributions and health insurance premiums. Plainly stated, your AGI will often result in a lower minimum monthly student loan repayment amount than providing your pay stub to your loan servicer.
Alternative Documentation of Income (ADOI)
In order to utilize ADOI, you will have to provide information directly to your loan servicer. The ADOI must be no older than 90 days. When you utilize ADOI, your loan servicer will take your proof of income and annualize the taxable income based on your rate of pay. Pay close attention to your pay frequency and taxable income only. If you're paid biweekly, you receive 26 paychecks vs. 24 if you're paid semimonthly. When providing ADOI, extrapolate your annualized taxable income for your loan servicer. The less you leave for them to interpret for you, the more accurate the calculation should be. Subtract out non-taxable items from your gross income like certain retirement plan contributions, health insurance premiums, health savings account contributions, etc.
If you are paid on production or receive a bonus periodically, either provide a description of your base taxable salary or choose a paycheck from the last 90 days that most closely matches your base salary without production. Production bonuses are not guaranteed. You may not want your loan servicer calculating an annualized gross or taxable income from a particularly productive month if that production level may not continue for the next twelve months. If you consistently receive a higher salary than your base, that will be captured in your AGI when you file your income taxes for that year.
Unemployment or Periods of Reduced Income
If you are unemployed or are in a situation with no taxable income, there is an application option to declare that you have no taxable income on the IDR application/renewal documentation (Section 4, IDR Plan Request). If you switch jobs or take a period of unpaid maternity leave, anything that reduces your income for more than a month or two and makes your current student loan payment difficult to make, you can have your IDR payment adjusted.
Periods of decreased income are where the IDR shines most. The Department of Education and your loan servicers are most interested in hearing about decreases to your income. If your current income decreases to zero, you may utilize the electronic application via studentaid.gov. If your current income has decreased but is not zero, then you will have to provide ADOI to your loan servicer and have them recalculate your monthly IDR amount. In this case, you will be expected to re-certify your income again the following year at which time you may utilize a recent AGI or whatever is going to result in the most reasonable IDR amount for you.
Sample of Discretionary Income and Monthly Repayment Under IDR for Taxable income of $99,000
The 2021 HHS poverty guidelines for family sizes of one and two for the 48 contiguous states and D.C. are $12,880 and $17,420, respectively. Poverty guidelines are updated every year in January.
Discretionary Income, Family size 1 = $99,000 – (150% × $12,880) = $79,680
PAYE/REPAYE monthly payment = (10%*$79,680)/12 = $664/mo
IBR (2009) monthly payment = (15%*$79,680)/12 = $996/mo
Discretionary Income, Family size 2 = $99,000 – (150% × $17,420) = $72,870
PAYE/REPAYE monthly payment = (10%*$72,870)/12 = $607/mo
IBR (2009) monthly payment = (15%*$72,870)/12 = $911/mo
If your loan servicer does not calculate a similar minimum monthly IDR payment as determined by your calculations, call to see how they arrived at their discretionary income and monthly payment figures. They often make mistakes!