Discretionary income is a significant factor when managing student loan payments.
However, not everyone knows the exact nature of the relationship between the two.
Any borrower who aims to handle payments successfully has to understand what discretionary income has to do with it.
Here is what you need to know.
Discretionary Income: Repaying Student Loans
Understanding Poverty Line
Before making the connection between discretionary income and student loan repayment, you must first have a basic knowledge of how to compute your discretionary income.
To do this, you need to consult the federal poverty line as of 2017.
What does one have to do with the other?
Discretionary income is just what is left of your income after you have paid your necessities (for instance, utilities).
However, the math is not that simple.
Find the poverty line that applies to your situation and multiply it by 150%.
Then, subtract the product from your adjusted gross income.
The difference is your discretionary income.
Let us say you are a single individual with a gross income of $25,000 per year.
For individuals, the poverty line is $12,060.
This amount multiplied by 150% is $18,090.
Subtracting this amount from $25,000, you get $6,910.
This is your discretionary income.
What Does It Have to Do with My Student Loan Payment?
Most borrowers repay their student loans under a specific repayment program.
Depending on your finances, your program is designed to determine a monthly payment and repayment period you can manage.
All of these things are hinged on your discretionary income.
Income-driven plans determine monthly payment based on the borrower’s discretionary income.
Let’s take the example of the single person above.
If the person is enrolled in, say, the Pay As You Earn Repayment Program (PAYE), then her monthly payment should be 10% of her discretionary income.
Therefore, she pays $691 every month.
(Did You Know? There’s plenty of repayment plans that you could benefit from depending on your situation. This 8-Plan Cheat Sheet breaks each of the best ones down for you, so you can easily select the one that best fits you and your lifestyle. Learn more and download it for free, here.)
Be Smart About Repayment
1. Save Money for a Rainy Day
Although discretionary income is understood as money after necessities, borrowers and non-borrowers alike know that this is not true all the time.
Sometimes, expenses do not end with utilities.
Incidentals and other unforeseen circumstances force people to shell out more money.
In cases like this, you only have your leftover income to use.
So, if you think this is your case, you might want to apply for the most affordable repayment plan.
2. Maximize Your Discretionary Income
The opposite is also true.
If your discretionary income is more than enough, then you may be able to get rid of student loans faster.
To do this, you must enroll in a plan that requires a bigger—but manageable—monthly payment.
Do this only if you are sure that you have enough money left after student loan payments and necessities.
You never know when and where you will need it.
3. Anticipate Changes
Finally, remember that discretionary income changes every year.
This is one-factor borrowers fail to take into consideration.
When deciding on a repayment plan, always take into account the uncertainty of financial situations.
So, enroll in a repayment plan you can manage even when you find yourself in a tight spot.
Being prepared helps significantly.
Watch this video from The Veterinarian’s Money Digest for more information on income-driven repayment plans:
Knowing how repayment works undoubtedly pays off.
With this knowledge, you can determine which method and strategy work best for you.
Once everything is set, you are one step closer to being free from student loans.
(PRO TIP: Need a bird’s eye view of all the options available for student loan repayment? Download the 8-Plan Cheat Sheet to Student Loan Repayment for free. Click here to learn more and grab your free copy.)
Be Smart About Repayment
What are your thoughts on income-driven repayment plans? Let us know in the comments section below.
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