Discretionary Income

Discretionary income is the single most important number in the income-driven repayment (IDR) system, because the monthly payment on every IDR plan is calculated as a percentage of it rather than as a fixed amortization of the balance. The federal definition is precise: take the borrower's adjusted gross income (AGI) from their tax return, then subtract a multiple of the annual federal poverty guideline for the borrower's family size and state of residence. The figure that remains is discretionary income, and the plan applies its stated percentage to that figure to set the payment. A borrower whose AGI sits below the poverty-line multiple has, by definition, zero discretionary income and therefore a calculated payment of zero dollars.

The multiple of the poverty guideline is what differs across plans, and this is the part of the system that has been in regulatory flux. For the long-standing plans — Income-Based Repayment (IBR) and Pay As You Earn (PAYE) — discretionary income is defined as AGI above 150% of the federal poverty guideline, with the payment capped at 10% of that amount. The older Income-Contingent Repayment (ICR) plan uses a less generous 100% threshold and a 20% payment rate. The SAVE plan introduced in 2023 used a more generous 225% threshold, which produced substantially lower payments, but SAVE was blocked by the federal courts and wound down during 2026, and the Department of Education has been directing affected borrowers toward other plans. Because the landscape continues to shift — a new Repayment Assistance Plan enacted in 2025 is scheduled to replace most IDR plans over the coming years — any borrower should verify the multiple and the rate for their specific plan directly at studentaid.gov rather than relying on a figure that may have changed.

A worked illustration shows why the multiple matters so much. Consider a single borrower in the contiguous states with an AGI of roughly $50,000. Under a plan using the 150% threshold, the poverty-line deduction is about one-and-a-half times the single-person guideline, leaving discretionary income of roughly $27,000 to $28,000; a 10% rate yields an annual payment near $2,700, or about $225 a month. Under a more generous threshold the deduction is larger, discretionary income is smaller, and the monthly payment falls accordingly. The same income produces materially different payments depending purely on which statutory multiple applies.

The figure is recertified every year, because both AGI and household size change over time and the poverty guidelines themselves are updated annually. Borrowers must resubmit income documentation on schedule or the servicer can revert them to a higher standard payment. The recertification mechanic is also why discretionary income interacts with tax filing: a married borrower who files separately may exclude a spouse's income from AGI on some plans, lowering the discretionary-income base and the payment — a meaningful planning lever that the federal-versus-private refinance decision and the IDR deep-dive both examine in detail.

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