When you splurge on a new video game or a new pair of shoes on payday, you’re using the income you have after your set expenses. If you have student loans, you might have very little income left over, so luxuries and small extras might be few.
If you’re struggling to keep up with your student loan payments on your current salary, one option is to sign up for an income-driven repayment (IDR) plan. With IDR, the money you have after expenses — your discretionary income — becomes very important.
Here’s how your discretionary income impacts your repayment plan.
What is discretionary income?
Discretionary income is the money you have after paying for necessary expenses like rent, utilities, and food. It’s what you use to buy non-essentials throughout the month.
If you’re short on cash or if you lose your job, the first thing you’ll do is reduce spending of your discretionary income. While you can’t eliminate rent payments, you have more control over your discretionary spending. You might go on a shopping ban to cut down on Target purchases or shop for cheaper alternatives, instead.
For example, let’s say you bring home $3,000 a month after taxes. Your rent and utilities are $1,000, and you spend $400 a month on groceries and $100 per month for car insurance. That means you have $1,500 of essential expenses and $1,500 in discretionary income.
One important thing to keep in mind is that some people use credit cards or other lines of credit to finance vacations, high-end clothing, or regular shopping sprees. This approach doesn’t count as discretionary income; using a credit card to pay for items, and not paying off the balance, is spending money you don’t have.
Discretionary income and student loans
When it comes to federal student loans and IDR plans, discretionary income works a little differently. Rather than looking at your individual expenses, the U.S. Department of Education considers your discretionary income to be your gross — after tax — income minus the poverty guidelines for your family size.
Each plan differs slightly, but for most IDR plans, your loan servicer will set your discretionary income as the difference between your income and 150 percent of the poverty guideline.
How to calculate discretionary income
Before you have to pay anything on most IDR plans, the government lets you keep your total salary (pre-tax) up to 150 percent of the poverty guideline. They consider that portion to be essential and non-discretionary.
For example, if you are single and your income is $30,000, you would subtract 150 percent of the poverty guideline for a one-person household: $18,090.
Your remaining income, $11,910, is considered your discretionary income. Split up over twelve months, that means you have $992.50 a month for non-essentials.
If, like me, math isn’t your strong point, don’t panic. You don’t have to do these calculations on your own. When you apply for an IDR plan, the government will ask for information about your expenses and income. They will do the calculations for you.
But having an understanding of how discretionary income works and how to calculate it can help you estimate your new payments.
How your discretionary income affects your payments
If you have several hundred dollars in discretionary income, that doesn’t mean all of your extra money will go toward your student loans. Instead, the government caps your payments at just a percentage of your discretionary income.
For IDR plans, you’ll pay between 10 and 20 percent of your discretionary income toward your loans each month. If you have little extra money, your payment could be much lower or you could even qualify for a $0 monthly payment.
Using the information from the above example, say you signed up for a Revised Pay As You Earn (REPAYE) plan and had $992.50 a month in discretionary income. REPAYE generally caps your payments at 10 percent of your discretionary income, so your monthly payment can’t exceed $99.25. If your loans are large, that can be a significant reduction.
However, while IDR plans can free up more cash flow each month, there are some downsides to consider. The government extends your repayment term to as long as 25 years. Even with lower payments, that means you could be paying much more in interest over the length of your loan. Make sure you understand how much you’ll spend on an IDR plan before signing up.
Reducing your student loan payment
When your budget is so tight that you have little to no breathing room, an IDR plan can be a lifesaver. Depending on your discretionary income, you can dramatically reduce your payments and make your loans more manageable.
If you’re ready to sign up for an income-driven repayment plan, we can help you through the process for free.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|