What Is Discretionary Income?

What Is Discretionary Income?

Discretionary income is the amount of money you have left over after paying for essential expenses—things like food, transportation, health care and bills. That's different from disposable income, which is your income after taxes are deducted (but before essential expenses are paid).

Think of discretionary income as the money you would use for optional spending like vacations, gym memberships, spa services, hobbies, eating out and entertainment. It can also include optional savings, like saving for a house down payment or building up your emergency fund.

Discretionary Income vs. Disposable Income

Discretionary and disposable income sound alike, and they're similar concepts, but they have key differences.

• Disposable income is a general personal finance term that simply describes how much income you have left after taxes are paid. It's money you have to use on essential and nonessential expenses.
• Discretionary income is a more specific term that's typically used in the world of federal student loans but is also considered when you're creating a budget. It accounts not just for the money left over after taxes but after you also deduct expenses you can't live without. This gives a more accurate picture of how much you have to spare after life's required costs, so it's used to help calculate payments for income-driven repayment plans for federal student loans and also a number you can use to calculate how much you have to work with each month when budgeting.

When Is Discretionary Income Important?

Discretionary income can help with budgeting, but it's especially important if you have federal student loans.

If you choose to be on an income-driven repayment plan for your federal student loans, your payment is based on a percentage of your discretionary income. Your family size is also factored in, since the goal is to ensure you can pay your loans while still having enough income for your family's size. That could even mean no monthly payment.

Here's how much of your discretionary income is required as payment on your student loans under each income-driven repayment plan:

• SAVE plan: Typically 10%
• PAYE plan: Typically 10%
• Income-based repayment (IBR) plan: Typically 10% if you're a new borrower on or after July 1, 2014 (if you're not a new borrower on or after July 1, 2014, it may go up to 15%)
• Income-contingent repayment (ICR) plan: Typically 20%

How to Calculate Discretionary Income

Calculating discretionary income differs depending on whether you're using it to help you create a monthly budget or to determine how much you may owe when repaying student loans.

Calculating Discretionary Income for Budgeting

To calculate your discretionary income for your own budgeting or knowledge, look at your take-home pay each month; in other words, the money you receive from your employer after taxes and other deductions that you have to work with. If you're self-employed and receive pretax income, calculate your average earnings minus what you owe for taxes.

Next, subtract all of your necessary expenses. Think of all the required costs for everyday life that are needs rather than wants, such as:

• Groceries
• Mortgage or rent
• Utility bills, such as power, water and internet
• Health care
• Insurance

Don't count recurring payments that aren't technically necessary, such as streaming services and gym memberships. The amount left is your discretionary income.

Example: To calculate this yourself, say your monthly take-home pay is $3,000. When you add up your necessary monthly expenses, they total $2,400. Subtract that from your take-home pay, and that indicates $600 in discretionary income each month.

Calculating Discretionary Income for Student Loans

Unfortunately, if you have federal student loans, it gets trickier: The government uses a different calculation for certain types of income-driven repayment plans. So if you have federal student loans, your discretionary income is based on a standardized formula rather than your actual amount. The goal is to ensure borrowers can actually afford their monthly payments.

For the first three plans listed above (SAVE, PAYE and IBR), the government calculates discretionary income as the difference between your annual income and 150% of the poverty guideline for your state and family size. For the last plan (ICR), it's the difference between your annual income and 100% of the poverty guideline.

For example, say you have a family of four and make $60,000 per year after taxes. For 2025, the federal government indicates a family of four has a federal poverty guideline of $32,150. Let's say you have an IBR plan, which uses the 150% formula.

• 150% of $32,150 = $48,225
• Discretionary income = $60,000 - $48,225 = $11,775 per year (about $981 per month)

The downside of this formula is it doesn't account for your true personal expenses, but it's how the government estimates it for purposes of ensuring income-driven student loan repayments are affordable.

The Bottom Line

Knowing your discretionary income is a basis for creating a budget that guides how much you save and spend, which could help you build financial security and meet your goals. It's also important if it factors into your federal student loan repayment.

Getting on an income-driven repayment plan for your federal student loans can lower your monthly payment, since it's based on what you can afford rather than a fixed amount. However, low payments and growing interest means it could take a long time to get out of debt (these plans could help you qualify for loan forgiveness programs, but it can take 10 to 25 years to qualify).

If you have a number of student loans, or you also have credit card debt, one option is to combine them into a debt consolidation loan. Some borrowers may find it easier to streamline debts into one monthly payment, and it's possible to nab better terms and lower interest rates. It could also free up some discretionary income to put toward other financial goals. It's important to note, however, that you'll lose important benefits that come with your federal student loans if you refinance them into a private loan, so proceed with caution. To explore your options, compare debt consolidation loans from Experian's partners.