Discretionary income is money you have left after you pay for essentials, like housing, food and taxes. This portion of your income goes toward "discretionary" wants, like entertainment and travel.
The federal government uses a discretionary income formula to set your student loan repayment amounts under income-driven repayment programs. This could change, though, with proposed legislation.
Discretionary income for student loans
For federal loans, the U.S. Department of Education uses a discretionary income total to determine your monthly bill for income-driven repayment plans. These plans can help lower your payment if you’re struggling to repay.
Discretionary income for income-driven repayment plans is calculated using the difference between your yearly adjusted gross income, or AGI, and the poverty line for your family size and state.
The percentage of income above the poverty line for the Income-Contingent Repayment plan is 100%, while Income-Based and Pay As You Earn repayment plans are 150%. Both the ICR and PAYE plans are actively being phased out by the federal government and are no longer available to new borrowers.
You can find your AGI on your most recent tax return. For 2026, it’s located on line 11 of IRS Form 1040.
Income-driven repayment plans cap your monthly payment from 10% to 20% of your discretionary income. Use a discretionary income calculator to see what your payments could look like — including a $0 payment if your AGI is low enough.
How discretionary income can change
Borrowers on income-driven repayment plans are required to recertify annually. This means you inform the Education Department of any changes to your family size or income so that your repayment amount may be recalculated.
Moving, getting married or receiving a pay increase can all impact your discretionary income amount. Even if you have no changes to income or family size, you must still recertify.
Changes to student loan repayment programs
President Donald Trump’s “one big, beautiful bill” introduced a new Repayment Assistance Plan (RAP) that will eliminate the use of discretionary income in calculating student loan repayment amounts. Instead, RAP uses gross income, rather than discretionary income, to determine payments.
Discretionary income for budgeting
Building a budget typically involves listing out your income and expenses and creating a spending-and-savings plan around your discretionary income.
First, you need to understand which expenses are essential, or nondiscretionary, to ensure you cover those each month. These usually include housing, utilities, groceries, gas and other fixed bills. Then, you can divide what you have left over — your discretionary income — based on a budgeting method.
Some budgeting methods to consider include the 50/30/20 budget, envelope system, pay yourself first or zero-based budget.
