When you splurge on a new video game or a new pair of shoes on payday, you’re using the income you have left after your set expenses. It’s also known as your discretionary income. If you have student loans, you might have little discretionary income left over, so luxuries and small extras might be few.
If you’re struggling to keep up with federal student loan payments on your current salary, one option is to sign up for an income-driven repayment (IDR) plan. An IDR plan limits your monthly student loan bill to a certain percentage of your income. The money you have left over after paying for necessary expenses — your discretionary income — can help determine what your new monthly student loan payment will be.
Here’s what you need to know about discretionary income and how it impacts the amount you’ll pay towards your student loans each month.
- What is discretionary income?
- Discretionary income and student loans
- How to calculate discretionary income
- How your discretionary income affects your payments
- Reducing your student loan payment
Discretionary income is the money you have left over from your post-tax income after paying for necessary expenses like rent, utilities and food. It’s what you use to buy non-essentials (or discretionary expenses) throughout the month.
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, which you can put toward discretionary expenses.
If you’re short on cash or lose your job, the first thing you’ll do is reduce your discretionary spending. 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 or Starbucks purchases or shop for cheaper alternatives instead.
One important thing to keep in mind is that some people use credit cards or lines of credit to finance vacations, high-end clothing or regular shopping sprees. This approach doesn’t count as spending discretionary income; using a credit card to pay for items and not paying off the balance means spending money you don’t have.
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 annual income minus 150% of the poverty guidelines for your family size and state. After-tax income is generally referred to as adjusted gross income, which is your or your household income minus certain deductions from income as reported on a federal income tax return.
Each plan differs slightly, but for most IDR plans, your loan servicer will set your discretionary income as the difference between your annual income and 150 percent of the poverty guidelines.
IDR plans were created by the federal government in order to help make student loan payments affordable, regardless of the amount you owe. They make payments affordable by not expecting you to make loan payments from any of the money from your total salary up to 150 percent of the poverty guidelines. That portion of your income is considered to be essential and non-discretionary. To assist with affordability, IDR programs require 10 percent to 20 percent of only your discretionary income as payment.
For example, if you are single, you live in California and your annual income is $30,000, you would subtract 150 percent of the poverty guideline for a one-person household: $18,735.
Your remaining income, $11,265, is considered your discretionary income. Split up over twelve months, that means you have $938.75 a month for non-essential spending.
If 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 income and 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. You can also calculate your potential payments before applying for an IDR plan using the education department’s Repayment Estimator tool.
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 a percentage of your discretionary income.
For IDR plans, you’ll pay between 10 percent and 20 percent of your discretionary income toward your loans each month. If you don’t have much 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 $938.75 a month in discretionary income. REPAYE caps your payments at 10 percent of your discretionary income, so your monthly payment wouldn’t exceed $93.88. If your loans are large, that can mean big savings because of the huge reduction in monthly payments.
However, while IDR plans can free up more cash each month, there are some downsides. Your repayment term can be extended to as long as 25 years. That means you could pay much more in interest over the life of your loan. Make sure you understand how much you’ll spend on an IDR plan before signing up.
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 and student loan balance, you could significantly reduce your payments and make your loans more manageable.
Jacqueline DeMarco contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
4 Important Disclosures for SoFi.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.