Discretionary income is the portion of your earnings left after subtracting taxes and a protected allowance for basic living costs. Federal agencies use this figure, not your gross pay, to decide how much you can afford to put toward student loans, tax debts, or a bankruptcy repayment plan. The formula shifts depending on which program is doing the math, but every version starts from the same idea: income minus the money you need to live on, with the remainder available for debt.
Discretionary Income Is Not the Same as Disposable Income
These two terms get used interchangeably, but they measure different things and different laws rely on different ones. Disposable income is your pay after legally required deductions like federal, state, and local taxes. Discretionary income goes further by subtracting necessary living expenses from that amount.
The distinction has real consequences. Federal wage garnishment caps are based on disposable earnings. Federal student loan repayment plans are based on discretionary income. Knowing which measure applies tells you how much of your paycheck a given program actually protects.
How the Calculation Works
Most federal formulas share two inputs: your adjusted gross income and the federal poverty guideline for your household size.
Adjusted Gross Income
Your adjusted gross income (AGI) is the starting figure. It appears on line 11 of IRS Form 1040 and reflects your total taxable income after pre-tax adjustments such as student loan interest deductions and retirement contributions.1Internal Revenue Service. Adjusted Gross Income AGI sits between your gross salary and your take-home pay, and federal programs treat it as the most reliable annual income snapshot.
The Federal Poverty Guideline
The second input is the poverty guideline published each January by the Department of Health and Human Services. For 2026, the guideline for a single person in the 48 contiguous states is $15,960, with $5,680 added for each additional household member.2Federal Register. Annual Update of the HHS Poverty Guidelines Alaska and Hawaii use higher figures: $19,950 and $18,360 for a single person, respectively.3U.S. Department of Health and Human Services. 2026 Poverty Guidelines HHS updates the numbers annually to reflect the previous year’s change in the Consumer Price Index.
The Basic Formula
Take your AGI and subtract the poverty guideline for your household size multiplied by a program-specific percentage. What remains is your discretionary income. If the result is zero or negative, the program treats your discretionary income as $0. The multiplier is what changes: student loan plans use 100%, 150%, or 225%, while bankruptcy courts and the IRS substitute their own allowable-expense standards.
Discretionary Income in Federal Student Loan Repayment
Income-driven repayment (IDR) plans are where most people first run into this term. Under an IDR plan, your monthly payment is set as a percentage of your discretionary income rather than a fixed amount based on the loan balance.4Federal Student Aid. What Does Discretionary Income Mean Federal regulations set a different poverty guideline multiplier and payment percentage for each plan.5eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
How the Plans Compare
- Income-Based Repayment (IBR) defines discretionary income as AGI minus 150% of the poverty guideline. Borrowers whose first federal loan came on or after July 1, 2014 pay 10% of that amount, spread over 20 years. Earlier borrowers pay 15% over 25 years.6Federal Student Aid. Top FAQs About Income-Driven Repayment Plans
- Pay As You Earn (PAYE) uses the same formula as IBR for newer borrowers: AGI minus 150% of the guideline, with payments at 10% over 20 years. PAYE closes to new applicants on July 1, 2027.7Federal Student Aid. Pay As You Earn (PAYE) Plan
- SAVE (formerly REPAYE) uses the most generous protection: AGI minus 225% of the guideline, with payments at 5% for undergraduate loans and 10% for graduate loans. Key provisions of SAVE have been blocked by federal court injunction, so check studentaid.gov for current availability before applying.5eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
- Income-Contingent Repayment (ICR) uses the smallest multiplier: AGI minus 100% of the guideline. Payments are 20% of that figure or what you would owe on a 12-year fixed plan, whichever is less, over 25 years.
A Worked Example
Say you’re a single borrower with an AGI of $45,000, enrolled in IBR as a new borrower. The 2026 poverty guideline for a household of one is $15,960. Multiply by 150% to get $23,940. Subtract that from $45,000 and your discretionary income is $21,060. Ten percent of that is $2,106 per year, or about $175.50 per month. If your AGI were below $23,940, your discretionary income would be $0 and your monthly payment would be $0.
Family Size Matters
Because the poverty guideline rises with each household member, family size directly changes your payment. A household of four has a 2026 poverty guideline of $33,000 in the contiguous states.2Federal Register. Annual Update of the HHS Poverty Guidelines Under IBR, 150% of that is $49,500, so a family-of-four borrower earning less than $49,500 would owe $0.
You have to recertify income and family size every year to stay on an IDR plan. Miss the deadline and your servicer can reset your payment to the standard 10-year amount, which is usually much higher.4Federal Student Aid. What Does Discretionary Income Mean
Discretionary Income in Chapter 13 Bankruptcy
Chapter 13 uses a related but distinct definition. The bankruptcy code sets disposable income as your current monthly income minus amounts reasonably necessary for your maintenance, your dependents’ support, and any domestic support obligations.8Office of the Law Revision Counsel. 11 U.S. Code 1325 – Confirmation of Plan If a creditor or the trustee objects to your plan, the court can require that all of your projected disposable income go to repaying unsecured creditors.
Whether your plan runs three years or five depends on how your income compares with your state’s median for a household of your size. Below the median, three years. At or above, five.9U.S. Courts. Chapter 13 – Bankruptcy Basics Allowable expenses follow the IRS Collection Financial Standards, which cap housing, utilities, food, clothing, and transportation by location and family size.10Internal Revenue Service. Collection Financial Standards
Discretionary Income for IRS Tax Debt
When you owe back taxes and apply for an installment agreement or offer in compromise, the IRS runs its own version of this analysis. It calls the figure “future remaining income”: gross monthly income minus allowable living expenses, multiplied by the months remaining on your payment terms.11Internal Revenue Service. Financial Analysis
Allowable expenses are capped by the Collection Financial Standards. For a single person in 2026, the food allowance is $497 per month; for a household of four, it rises to $1,255.12Internal Revenue Service. National Standards – Food, Clothing and Other Items Housing and utility caps vary by county to reflect local rent, mortgage, tax, insurance, and service costs.10Internal Revenue Service. Collection Financial Standards What remains after these allowances is what the IRS considers available to pay the debt.
For an offer in compromise paid within five months, the IRS multiplies your monthly surplus over a 12-month window. For offers paid over six to 24 months, the window stretches to 24 months.11Internal Revenue Service. Financial Analysis A lower monthly surplus produces a smaller acceptable offer, so documenting necessary expenses carefully is central to any settlement.
One Boundary Worth Knowing
If you’re looking up discretionary income to figure out how much of your paycheck a creditor can garnish, the answer uses a different measure. The Consumer Credit Protection Act caps garnishment based on disposable earnings, not discretionary income.13Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment For ordinary consumer debts, the limit is the lesser of 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage.14U.S. Department of Labor. Fact Sheet 30 – Wage Garnishment Protections of the Consumer Credit Protection Act The living-expense subtraction that defines discretionary income doesn’t enter that calculation.