Discretionary Income for Student Loans: Formula and Example

Discretionary income for student loans is a specific federal formula: your adjusted gross income minus a percentage of the federal poverty guideline for your family size and location. The percentage depends on which income-driven repayment plan you’re on. If the subtraction produces zero or a negative number, your discretionary income is treated as zero, which usually means a $0 monthly payment.¹

This is narrower than what “discretionary income” means in everyday budgeting. It has nothing to do with what’s left after rent and groceries. It’s a defined term under 34 CFR § 685.209, and it exists for one purpose: to set your monthly bill on an income-driven repayment (IDR) plan.

The Three Numbers That Drive the Calculation

You need three things: your AGI, your family size, and the poverty guideline for your household.

Adjusted Gross Income

Your AGI sits on line 11 of your most recent Form 1040. It’s your total income minus certain adjustments like retirement contributions, deductible student loan interest, and self-employment tax. It does not subtract the standard deduction or itemized deductions, so it runs higher than your taxable income.²

If your income has fallen sharply since you last filed, you don’t have to use the AGI on your return. You can send recent pay stubs or other documentation and ask your servicer to calculate an annualized income figure instead. That figure replaces AGI in the formula.³

Family Size

A larger family raises your protected threshold and lowers your payment. The Department of Education counts:

You, the borrower
Your spouse, if you file a joint federal tax return
Your children, including unborn children expected during the certification year, if they receive more than half their support from you
Other dependents living with you who receive more than half their support from you

Unborn children who will be born during the year you’re certifying count. That one gets missed often.¹

Poverty Guideline

The Department of Health and Human Services publishes updated poverty guidelines every January. The 2026 figures for the 48 contiguous states and Washington, D.C. are:

1 person: $15,960
2 people: $21,640
3 people: $27,320
4 people: $33,000
Each additional person: add $5,680

Alaska and Hawaii use higher guidelines. For a single person in 2026, the figure is $19,950 in Alaska and $18,360 in Hawaii.⁴ The number that applies to you is the one in effect when your servicer runs your calculation.

The Formula

Discretionary Income = AGI − (Poverty Guideline × Plan Multiplier)

The multiplier is set by your plan:

SAVE: 225%
IBR and PAYE: 150%
ICR: 100%

A higher multiplier shields more income and produces a smaller discretionary figure, which produces a smaller payment. If the result is zero or negative, discretionary income is $0.¹

Worked Example

A single borrower in the lower 48 with $50,000 in AGI, using the 2026 guideline of $15,960:

IBR or PAYE (150%): $15,960 × 1.50 = $23,940 protected. Discretionary income = $50,000 − $23,940 = $26,060.
SAVE (225%): $15,960 × 2.25 = $35,910 protected. Discretionary income = $50,000 − $35,910 = $14,090.
ICR (100%): $15,960 × 1.00 = $15,960 protected. Discretionary income = $50,000 − $15,960 = $34,040.

Same income, three very different discretionary figures.⁴

Turning Discretionary Income Into a Monthly Payment

Discretionary income is only half the picture. Each plan then takes a percentage of that number and divides by 12 for the monthly bill.

SAVE: 5% for undergraduate loans, 10% for graduate loans, weighted by original balance if you have both.¹
PAYE: 10%, capped at what you’d pay on a 10-year standard plan.
IBR for new borrowers on or after July 1, 2014: 10%, capped at the 10-year standard amount.
IBR for borrowers before July 1, 2014: 15%, same cap.¹
ICR: 20%, or what you’d pay on a 12-year fixed plan adjusted by an income percentage factor, whichever is lower.⁵

Back to that single borrower with $50,000 in AGI. On new-borrower IBR, 10% of $26,060 works out to about $217 a month. On SAVE with undergraduate loans, 5% of $14,090 is about $59 a month. On ICR, 20% of $34,040 comes to about $567. The plan choice alone creates a nearly tenfold spread on the same income.

SAVE Is Currently Blocked

The SAVE numbers above describe the plan as written, not as available. On March 10, 2026, a federal court issued an injunction stopping the Department of Education from implementing SAVE. Borrowers enrolled in SAVE or with a pending SAVE application were placed in an interest-free forbearance, but that forbearance has ended. Affected borrowers now have to pick a different plan, and if they don’t, their servicer will move them to one.⁶

In practical terms, the 225% multiplier and 5% undergraduate payment rate are not options right now. If you’re picking an IDR plan today, you’re choosing among IBR, PAYE, and ICR, all of which use lower multipliers and higher payment percentages. The litigation is ongoing, so the picture may change.

How Marriage Changes the Numbers

If you’re married and file a joint tax return, your spouse’s income is added to yours in the formula. For PAYE, IBR, and ICR, that combined AGI drives the calculation and can push your payment well above what your income alone would produce.¹

Filing separately changes that. Under PAYE, IBR, and ICR, a separate return means only your income counts. Filing separately generally costs more in taxes because you lose certain credits and deductions, so whether the switch pays off depends on the income gap between spouses, your loan balance, and your plan.⁷ It’s worth running both scenarios.

When both spouses have federal student loans and file jointly, the calculated household payment gets split by each spouse’s share of the combined federal loan balance. Owe $60,000 against a spouse’s $40,000, and you’re responsible for 60% of the payment.⁷

Recalculating When Your Income Drops

You don’t have to wait for your annual recertification if your income has fallen. Log into StudentAid.gov and select “Manage Your Plan” on the IDR Plan Request page, or submit documentation to your loan servicer directly.³

Supporting documents like pay stubs or an employer letter have to be dated within 90 days of when you sign the request. Tax returns are the exception and can be up to a year old. You’ll need proof of pay frequency and at least one document for each source of taxable income so the servicer can build an annualized figure to substitute for AGI.

1
eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
2
Internal Revenue Service. Adjusted Gross Income
3
Federal Student Aid. Top FAQs About Income-Driven Repayment Plans
4
Federal Register. Annual Update of the HHS Poverty Guidelines
5
Federal Register. Annual Updates to the Income-Contingent Repayment (ICR) Plan Formula for 2025
6
Federal Student Aid. IDR Court Actions
7
Federal Student Aid. 4 Things to Know About Marriage and Student Loan Debt