How Is Discretionary Income Calculated For Student Loans
Discretionary income is a term that refers to the amount of money you have after paying your monthly expenses. It’s one of the key factors that determines how much you can afford to pay on student loans.
How Is Discretionary Income Calculated For Student Loans?
The first step in calculating discretionary income is to determine exactly what your monthly expenses are. This includes all your bills, including credit card payments, car loans, and child support payments. It also includes things like food and housing costs.
Once you know how much money you’re left with after paying your bills, it’s time to calculate discretionary income. To do this, subtract the total amount of money you have left every month from 30% of your gross income (gross income includes all sources of income—salaries, bonuses). If this number is less than zero, then you don’t have any discretionary income at all! In order for loans like Stafford or Perkins loans to be eligible for forgiveness or cancellation under Public Service Loan Forgiveness, borrowers must make 120 qualifying monthly payments (10 years) while employed full-time in public service jobs; they must also meet other requirements (such as having Direct Loans). If they don’t meet these requirements but still want their loans forgiven
How Is Discretionary Income Calculated For Student Loans
Pertaining to the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan, and loan rehabilitation, discretionary income is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence.
Pertaining to the Income-Contingent Repayment Plan, discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your family size and state of residence.
If you’re struggling to afford federal student loan payments, you may be able to lower them with an income-driven repayment plan. Your new monthly payment will be capped at 10%, 15% or 20% of your discretionary income, depending on the plan. Your eligibility will depend on the type of federal loan you have.
Discretionary income is the amount of money you have left over after paying for necessary expenses, and it’s used to calculate student loan payments on several federal repayment plans. Income-driven repayment plans use your discretionary income to help determine your monthly student loan payment, so it’s important to know exactly what your discretionary income is.
What is discretionary income?
In a basic sense, discretionary income is the extra income you have after paying for basic necessities, or income that you can use for nonessential expenses. The federal government uses your discretionary income, calculated using your state’s federal poverty guidelines, to decide how much you can afford to pay each month toward your student loans when you sign up for income-driven repayment.
What discretionary income is used for
Income-driven repayment (IDR) plans are one option for federal student loan borrowers. With these plans, your payments will be adjusted based on how much you actually earn, and you’ll pay that amount over a period of 20 to 25 years. IDR plans generally calculate your payment as 10 percent or 15 percent of your discretionary income. These plans are designed to lessen the burden on borrowers and ensure that they can make their payments comfortably.
How discretionary income can change
When it comes to determining your payment on an IDR plan, discretionary income is not a one-time calculation. You have to resubmit your income, family size and state of residence information every year. Federal poverty guidelines are also updated every year, so it’s very likely that your monthly payment will change.
Borrowers who live in Hawaii and Alaska have higher federal poverty guidelines than the rest of the United States. If you move from California to Hawaii, you may see a lower monthly payment.
If you receive a large salary increase, then your payments may also increase. On the other hand, if you lose your job or downgrade to working part time, your payments will likely decrease. In fact, people who are unemployed generally have a $0 monthly payment. These payments will still count toward the necessary requirement for income-driven loan forgiveness.
Family size is also important when calculating discretionary income. The federal poverty guidelines increase as the family size increases. For example, the federal poverty guidelines for a single person in most states is $12,880, but it’s $17,420 for a family of two.
How to calculate your discretionary income
When calculating discretionary income for an IDR plan, the first step is to figure out what your income is and whether you should include your spouse’s income. This depends on the type of repayment plan you choose. For most IDRs plans, your spouse’s income will be included only if you file taxes jointly. However, your spouse’s income will be included in all cases with the Revised Pay As You Earn (REPAYE) Plan.
Once you know your personal income, look up the federal poverty guidelines for your state and family size. Multiply the federal poverty amount by 150 percent (or 100 percent if you’re pursuing the Income-Contingent Repayment Plan) and then subtract your income. That is your discretionary income.
Income-driven repayment plan example
Let’s say you live in New York and earn $40,000. The federal poverty guideline for New York is $12,880; multiplying that number by 150 percent gives you $19,320. By subtracting $19,320 from $40,000, you’ll get a discretionary income of $20,680.
Each of the income-driven repayment plans use a different formula to calculate your monthly payment, typically either 10 or 15 percent of your discretionary income. If you signed up for Pay As You Earn (PAYE), which charges 10 percent of your discretionary income, you would pay $2,068 per year toward your student loans, or roughly $172 per month.
You can also use the U.S. Department of Education’s loan simulator. The simulator will assess your personal information and calculate what your monthly payments would be under all of the payment plans you qualify for. From there, you can decide if you want to change your repayment plan or stick with the standard plan.
what is discretionary income used for
What is a Discretionary Income?
Discretionary income is the amount of money left for an individual to spend or save after paying taxes and for personal needs, such as food, lodging, and clothes. Discretionary income includes money spent on luxury goods, holidays, and non-essential goods and services.
Since discretionary income is the first to decline amid job loss or reduction in wages, companies selling discretionary products continue to suffer the most during economic downturns and recessions.
Analysing Discretionary Income
Discretionary spending is a significant part of a balanced economy. Citizens spend money on such items as travel, movies, and consumer goods only if they have the funds to do so. Many people purchase luxury items using credit cards, but through personal debt is not the same as getting discretionary income.
Difference Between Disposable Income and Discretionary Income
Disposable income and discretionary income are terms that are often used interchangeably but apply to different forms of revenue. Discretionary revenue comes from discretionary income, which is the equivalent of gross income minus tax.
In other words, disposable income is the take-home pay of an individual used to cover major as well as non-essential expenses. Discretionary income is what is left of discretionary income after the wage-earner accounts for rent/hypothecary, housing, lodging, electricity, insurance and other essential expenses. For most customers, when a pay cut happens, disposable income gets drained first.
Economy and Discretionary Income
Discretionary income is a significant predictor of economic health. Along with disposable income, economists use it to derive other critical financial ratios, such as the marginal consumption propensity (MPC), marginal saving propensity (MPS), and market leverage ratios.
Over time, aggregate disposable income rates fluctuate for an economy, usually in line with business-cycle activity. As calculated by the gross domestic product (GDP) or another gross indicator, when economic production is substantial, disposable income levels appear to be also high.