Discretionary Income: Examples and How to Calculate

Q: What is discretionary income for federal student loans?

For federal student loans, discretionary income typically refers to the difference between your adjusted gross income and 150% of the poverty guideline for your state and family size. However, for the Income-Contingent Repayment plan, discretionary income uses 100% of the poverty guideline, rather than 150%.

Q: What is a good discretionary income?

A good discretionary income will vary depending on your circumstances and goals. Ideally, you might aim to have enough discretionary income left over to build an emergency fund, save for retirement, and meet your other financial goals.

Q: Is Social Security discretionary income?

Yes, Social Security benefits can be taken into account when you calculate your discretionary income, since they are a source of income. Discretionary income is the difference between your income, including any Social Security benefits or pension, and your essential expenses.

Rebecca SafierUpdated April 21, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

You’ve probably heard the term “discretionary income” and wondered exactly what it meant. Discretionary income refers to the income you have left after taxes and necessary expenses. It’s basically your spending money, and it’s also an important part of the calculation for student loan payments on an income-driven repayment plan. Read on to learn more, including discretionary income examples and the differences between disposable vs. discretionary income.

What Is Discretionary Income?

Discretionary income refers to the money you have left over after you’ve paid taxes and essential expenses. You might calculate your discretionary income as an individual or a household. Essential expenses are those you need to survive or are required to pay. They include:

Mortgage or rent
Food
Utilities
Student loans
Car payments
Health insurance
Taxes

You wouldn’t include non-essential expenses in this calculation, such as vacations, restaurant meals, museum tickets, concerts, or other goods and services that aren’t deemed necessary.

Discretionary Income Examples

There are a few different ways to calculate discretionary income, depending on whether you’re estimating it for your own purposes or for an income-driven repayment plan on your federal student loans.

Discretionary Income for an Individual or Household

If you’re trying to figure out your individual or household discretionary income for your own budgeting purposes, you can determine it by subtracting your total essential expenses from your post-tax income. This is the formula to calculate discretionary income:Post-tax income - essential expenses = discretionary incomeFor example, let’s say your gross income is $60,000 and you’re taxed at 22%. After taxes, your net income is $46,800 (60,000 - (60,000 x 0.22)).If your essential expenses, including housing, food, and bills, add up to $35,000, subtract that amount from your post-tax income. That leaves you with a discretionary income of $11,800.

Discretionary Income for Income-Driven Student Loan Repayment Plans

Discretionary income is also used when you apply for an income-driven student loan repayment plan, but the Department of Education calculates it a little differently. Income-driven plans adjust your federal student loan payments to 10%, 15%, or 20% of your discretionary income. For the Income-Based Repayment, Pay As You Earn, and Revised Pay As You Earn plans, discretionary income equals the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state.Unlike the first example, this calculation relies on your adjusted gross income, which is your pre-tax income minus any deductions you took. The Department of Education relies on your tax returns when you apply for an income-driven plan. If you want to calculate your discretionary income for one of these income-driven plans, first figure out your adjusted gross income from the previous year. Then, consult the official poverty guidelines for the current year. Here they are for 2023 for 48 states and Washington, D.C. (Alaska and Hawaii have slightly different guidelines):

Persons in family/household	Poverty guideline
1	$14,580
2	$19,720
3	$24,860
4	$30,000
5	$35,140

Let’s say, for example, that your adjusted gross income is $60,000 and you’re a single filer. To calculate your discretionary income for three of the four repayment plans, you’ll use this formula: $60,000 - (1.5 x $14,580) = $38,130If your student loan payment is adjusted to 10% of your discretionary income, expect to pay about $318 per month. If it’s adjusted to 15% of your discretionary income, you’ll pay about $477 each month.

Discretionary Income for the Income-Contingent Student Loan Repayment Plan

Along with IBR, PAYE, and REPAYE, the government offers a fourth income-driven repayment plan: Income-Contingent Repayment (ICR). ICR adjusts your student loan payments to 20% of your discretionary income and extends your loan terms to 25 years. Unlike the other plans, however, ICR calculates discretionary income to be the difference between your adjusted gross income and 100% of the poverty guideline for your state and family size.

What Is Disposable Income?

Although the terms sound similar, disposable income is not the same as discretionary income. Disposable income refers to the income you have left over after paying taxes. When it comes to disposable vs. discretionary income, your disposable income will be higher, since it doesn’t include essential expenses in its calculation. Your disposable income is the amount you have after paying taxes to spend on essential and non-essential expenses alike, as well as to save for retirement, set up an emergency fund, invest, or use for other goods, services, or savings goals.

Disposable Income Examples

Let’s say that you make $60,000 per year and owe $13,200 in taxes. To calculate your disposable income, use this formula: Gross income - income taxes = disposable income In this case, your disposable income would be $46,800. That’s the money you have available to spend on both essential and non-essential expenses. Recommended: Guide to Setting Savings Goals

Disposable Income vs Discretionary Income

Disposable income refers to the income you have left over after taxes. Discretionary income is what you have left after taxes and essential expenses. That’s the difference between disposable income vs. discretionary income.When you calculate disposable income, you simply subtract your tax obligations from your gross income. But when it comes to how you calculate discretionary income, you subtract not only taxes, but also the payments you make on housing, utilities, food, loan payments, and other necessary expenses. As mentioned, discretionary income is also a key metric that the Department of Education uses when calculating your student loan payment on an income-driven repayment plan.

Can Discretionary Income Change?

Your discretionary income depends on your income and expenses. If your gross income or expenses change, your discretionary income will change as well. If you want to increase your discretionary income, for instance, you could focus on boosting your earnings with a raise, a new job, or a side hustle. Cutting expenses to pay off debts or decreasing how much you spend on housing or groceries could also leave you with more discretionary income at your disposal. In this way, understanding your discretionary income can help you save money fast.As you’re building your savings, you could put your money to work in a high-interest savings account. With a high-interest account, you can earn more interest as you save, which could help increase your discretionary income. When calculating discretionary income for student loans, the amount can also change from year to year as the government adjusts federal poverty guidelines. Recommended: What Is Zero-Based Budgeting (ZBB)?

The Takeaway

Understanding your disposable vs. discretionary income is important when planning your household budget and looking at your average savings. Once you’ve covered your essential expenses, you can come up with a budgeting plan for your leftover money, whether that means setting up an emergency fund, investing for the future, or using it for another purpose. If you’re interested in a savings account where your money can earn more interest, Lantern can help. In our banking marketplace, you can compare high-interest savings accounts to find one with the best rate for your needs.

Frequently Asked Questions

What is discretionary income for federal student loans?

What is a good discretionary income?

Is Social Security discretionary income?

Photo credit: iStock/EKIN KIZILKAYA

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About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

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