Discretionary Income
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 for calculating payments for federal student loans using income-driven repayment (IDR) plans. The Discretionary Income calculations can be different depending on the income-driven plan you use.
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 (no more than two years); or
b. Alternative documentation of income 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 (https://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 an IDR. Renew your income and family size when it changes!
Income-Contingent Repayment (ICR) defines Discretionary Income as your taxable income less the poverty level as determined by the U.S. Department of Health and Human Services (HHS).
ICR Discretionary Income = Your Taxable Income - HHS federal poverty guidelines
Income-Based Repayment (IBR) and Pay as you Earn (PAYE) define Discretionary Income 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:
IBR and PAYE Discretionary Income = Your Taxable Income – (150% × HHS federal poverty guidelines)
The Saving on a Valuable Education (SAVE) plan (updated from REPAYE) defined Discretionary Income as your taxable income less 225 percent of the poverty level as determined by the U.S. Department of Health and Human Services (HHS). A higher percentage protects more of your income and lowers your monthly student loan payment. Written as a formula:
SAVE Discretionary Income = Your Taxable Income – (225% × HHS federal poverty guidelines)
*SAVE is no longer available. It was blocked by a federal appellate court in July 2024 pending further litigation. Recently, the Department of Education reached a settlement to eliminate SAVE. The final end date for SAVE is yet to be determined.*
Sample of Discretionary Income and Monthly Repayment Under IDR for Taxable income of $125,510
The 2025 HHS poverty guidelines for family sizes of one for the 48 contiguous states and D.C. are $15,650. Poverty guidelines are updated every year, usually in the third week of January:
ICR Discretionary Income, Family size 1 = $125,510 - $15,650 = $109,860
IBR/PAYE Discretionary Income, Family size 1 = $125,510 – (150% × $15,650) = $102,035
SAVE Discretionary Income, Family size 1 = $125,510 – (225% × $15,650) = $90,298
SAVE monthly payment= (5%-10%*$90,298)/12 = $376-752/mo
PAYE/IBR 2014 monthly payment = (10%*$102,035)/12 = $850/mo
IBR 2009 monthly payment = (15%*$102,035)/12 = $1,275/mo
ICR monthly payment is the lower of your payment determined by a fixed monthly plan over 12 years multiplied by an income factor (see ICR page for details), OR 20% of your ICR discretionary income = (20%*$109,860)/12 = $1,831/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!
Repayment Assistance Plan
Recent legislation created a new Repayment Assistance Plan (RAP) that is scheduled to be available by July 1, 2026. RAP does not use the Discretionary Income formula to calculate your monthly payment. Instead, RAP takes a percentage of your taxable income only. There is also a $50 monthly reduction in payment per dependent claimed on your tax return. See the RAP page for more details.
Your Taxable Income
Your taxable income 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.
Alternative or Current Documentation of Income
In order to utilize alternative documentation, you will have to provide information directly to your loan servicer. The alternative documentation must be no older than 90 days. When you utilize alternative documentation, 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 alternative documentation, 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 non-taxable items from your gross income like certain retirement plan contributions, health insurance premiums, health savings account contributions, etc.
Electronic Application
Currently, the easiest way to certify your income for IDR is 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.
Production/Bonus Pay
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 to calculate 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 in 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 alternative documentation 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.