Knowing what your discretionary income is can help you build a solid financial plan, work toward goals like buying a home, and may impact how you repay your student loans. Here's what you need to know about discretionary income and how to calculate yours.
What is discretionary income?
Discretionary income is the earnings that remain after you’ve paid all your necessary expenses, like taxes, household bills, debt, health care, transportation, and groceries. Basically, it’s the money you have left over to pay for nonessential items.
Calculating your monthly discretionary income is important for building a personal budget and focusing on your top financial priorities. This extra cash gives you the financial wiggle room to pay off debt sooner, spend on discretionary items like entertainment, or save for future financial goals like buying a house or going on vacations.
Discretionary income is also commonly used by the federal government to determine student loan payments or eligibility for certain income-based repayment or rehabilitation plans.
How to calculate discretionary income
Understanding your financial situation starts by calculating how much discretionary income you have each month. Doing so will help you figure out how much money you have left over to save and spend, and it will also give you a benchmark that you can use when making a budget for your essential expenses.
1. Calculate your annual take-home pay.
If you have a full-time job, you can look at your paystub to find your take-home pay after taxes, deductions, and deferrals.
If you don't have a full-time job or a paystub, start with your personal income taxes using your effective tax rate, which is your total tax divided by your total income.
To estimate your take‑home pay, start with your expected annual income, apply a reasonable effective tax rate to approximate your total taxes, and subtract that amount. It’s wise to be conservative—either assume slightly higher taxes or slightly lower take‑home—so you’re not caught short.
2. Add up your essential expenses.
This includes rent or mortgage, utilities, transportation, health care, minimum debt payments, and basic living expenses. Unsure if something is essential? Ask yourself, "Would my daily life be the same without this?" If yes, it’s probably nonessential.
3. Subtract your essential expense costs from your annual take-home pay.
The result is your discretionary income.
Disposable vs. discretionary income
Disposable income and discretionary income are often confused, but they are very different calculations. Whereas your discretionary income is your earnings after essential expenses and taxes, your disposable income is your earnings after taxes.
One easy way to remember the difference: Your disposable income is the money “at your disposal” after you’ve paid your taxes, and your discretionary income is the money left to spend “at your discretion” after you’ve already covered necessary taxes and expenses.
Knowing both your disposable and discretionary income can help you budget effectively and accurately. Once you’ve calculated both, you’ll not only discover how much money you have on hand to spend each month, but you will also know how much money you have left over to allocate toward long-term goals.
How does discretionary income affect student loans?
Discretionary income is one of the key factors the federal government uses to determine student loan payment amounts for income-driven repayment plans and to decide whether you’re eligible for certain student loan repayment or rehabilitation plans.
Just be aware that the federal government uses a different equation to calculate your discretionary income. Instead of subtracting the total amount you pay in taxes and essential living expenses from your annual income, the federal government uses the Department of Health and Human Services’ poverty guidelines for your family size and state of residence to calculate your discretionary income.
Different student-loan repayment plans use different discretionary income benchmarks to determine eligibility and payment amounts. For example, the Repayment Assistance Plan, set to launch in 2026, bases monthly student loan payments on your adjusted gross income (AGI)—your yearly earnings minus certain deductions, such as retirement contributions, HSA deposits, student loan interest, and self-employed health insurance premiums.
With some student loan repayment plans, you’ll need to submit your discretionary income every year. If you get a pay bump, lose your job, move to a new state, have a child, or get married over the course of the year, the amount you owe could change significantly. Also, keep in mind that the federal government updates its poverty guidelines once a year, which could also impact your payments.
Why is it important to know your discretionary income?
Beyond determining whether you may qualify for certain income-based student loan repayment plans that could lower your expenses, calculating your discretionary income also enables you to create a budget.
Tracking your expenses may seem like a lot of work, but a budget can help you better understand your spending habits and create a plan to help achieve your financial goals. Just be sure to keep long-term financial goals, like saving for retirement, and paying off debt, in mind when determining how much of your discretionary income you will spend or save for other expenses.