If you’re considering applying for student loans, one of the most important things to understand is how discretionary income is calculated. This can have a significant impact on how much you’ll be required to pay each month and over the life of the loan. In this article, we’ll provide a comprehensive guide on how to calculate discretionary income for student loans and explain the factors that affect it.
Understanding Discretionary Income
Discretionary income is the amount of money that you have left over after paying for your basic living expenses. For student loan borrowers, discretionary income is used to determine how much they’ll be required to pay each month under certain repayment plans. The lower your discretionary income, the lower your monthly payment will be.
Factors That Affect Discretionary Income
There are several factors that can affect your discretionary income, including your income, family size, and state of residence. Your income is the most important factor, as it’s used to determine how much you’ll be required to pay each month. If your income is higher, you’ll be required to pay more each month.
Family size also plays a role in determining discretionary income. The more people you have in your household, the more you’ll be able to deduct from your income when calculating discretionary income. This is because more people typically means more expenses.
Finally, your state of residence can also affect your discretionary income. Some states have higher costs of living than others, which means that borrowers in those states will have a lower discretionary income and a lower monthly payment.
How to Calculate Discretionary Income
To calculate your discretionary income, you’ll need to start by determining your adjusted gross income (AGI). This is your total income minus certain deductions, such as student loan interest or contributions to a retirement account.
Next, you’ll need to calculate your basic living expenses. These include things like housing, food, transportation, and child care. You’ll need to use the federal poverty guidelines to determine how much you should be spending on these expenses based on your family size and state of residence.
Finally, you’ll subtract your basic living expenses from your AGI to determine your discretionary income. The result is the amount of money that you’ll be required to pay each month under certain repayment plans.
How Discretionary Income Affects Repayment Plans
Discretionary income plays a key role in determining how much you’ll be required to pay each month under certain repayment plans. For example, the Income-Based Repayment (IBR) plan, Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) plans all use discretionary income to determine monthly payments.
Under these plans, your monthly payment will be 10-20% of your discretionary income, depending on the plan you choose. The lower your discretionary income, the lower your monthly payment will be.
How to Lower Your Discretionary Income
If you’re looking to lower your discretionary income and lower your monthly student loan payment, there are a few things you can do. One option is to increase your basic living expenses. This can be done by increasing your housing costs or by adding more people to your household.
Another option is to lower your income. This can be done by taking a pay cut or by starting your own business.
Conclusion
In conclusion, understanding how discretionary income is calculated for student loans is crucial for determining your monthly payment and overall repayment plan. By understanding the factors that affect discretionary income, such as income, family size, and state of residence, you can make informed decisions about how to lower your discretionary income and reduce your monthly payment. It’s important to remember that there are different repayment plans that use discretionary income to determine monthly payments, and that the lower your discretionary income, the lower your monthly payment will be. With this knowledge, you can make an informed decision about your student loan repayment and make the process less stressful.