The discretionary income threshold plays a crucial role in federal student loan repayment plans, especially income-driven repayment (IDR) options like the SAVE Plan, PAYE, and IBR. Essentially, it defines how much of your Adjusted Gross Income (AGI) is considered “discretionary” or available to make student loan payments after accounting for basic living needs.
How Discretionary Income Threshold Works
The threshold is tied to the Federal Poverty Guidelines which vary by family size and geographic location. The threshold protects a portion of your income to ensure you have enough for essential living expenses. Only the income above this threshold is used to calculate your monthly loan payment, typically set as a percentage (between 5% and 20%) depending on the repayment plan.
For example, the new SAVE Plan uses 225% of the Federal Poverty Guideline as its threshold, offering borrowers greater income protection compared to earlier plans like PAYE and IBR, which use 150% of the poverty guideline.
Calculation Example
Assume Maria, a single borrower in Florida, earns an AGI of $45,000 in 2024. The 2024 Federal Poverty Guideline for a single person is $15,060. Under the PAYE plan, the threshold is 150%:
- Threshold: $15,060 x 1.5 = $22,590
- Discretionary Income: $45,000 – $22,590 = $22,410
- Annual Payment (10%): $2,241
- Monthly Payment: $186.75
Under the SAVE plan, the threshold is 225%:
- Threshold: $15,060 x 2.25 = $33,885
- Discretionary Income: $45,000 – $33,885 = $11,115
- Annual Payment (10%): $1,111.50
- Monthly Payment: $92.63
As shown, a higher threshold significantly lowers the calculated payment.
Key Thresholds in Federal IDR Plans
| Plan | Income Protected (Threshold) | Payment Percent of Discretionary Income |
|---|---|---|
| SAVE | 225% of Poverty Guideline | 10% (weighted 5-10% for undergrad loans from July 2024) |
| PAYE | 150% of Poverty Guideline | 10% |
| IBR | 150% of Poverty Guideline | 10% (new borrowers) or 15% (older borrowers) |
| ICR | 100% of Poverty Guideline | 20% |
The SAVE Plan offers the most income protection and potentially the lowest payments, making it a favorable choice for many borrowers.
Important Considerations
- Recertify Annually: Always submit updated income and family information to your loan servicer yearly to keep your payment accurate.
- Use Adjusted Gross Income (AGI): Payments are calculated based on your AGI from your latest tax return (Form 1040, Line 11), not your total salary.
- Update Family Size: Changes like marriage or having a child affect the poverty guideline used, thus your payment.
- Tax Filing Status Effect: Married borrowers filing jointly must include both incomes, which can increase payments, unlike filing separately.
Learn More
Understanding discretionary income and IDR plans helps borrowers manage payments effectively. For detailed plan information, see our articles on Income-Based Repayment and Revised Pay As You Earn (REPAYE). Learn more about poverty guidelines on the HHS website.
References
- U.S. Department of Education, Federal Student Aid: What is Discretionary Income?
- Federal Poverty Guidelines (2024), HHS ASPE
- SAVE Plan updates, Federal Student Aid
This comprehensive understanding of the discretionary income threshold enables borrowers to optimize their student loan repayments effectively.
