Personal Finance Basics

What is Discretionary Income?

Discretionary income is money left after paying taxes and covering necessities. It’s what you choose to spend or save. For federal programs, such as Income-Driven Repayment (IDR) plans for student loans administered by the Department of Education, discretionary income is legally defined as the amount by which an individual's Adjusted Gross Income (AGI) exceeds a set percentage (usually 150% or 225% under the SAVE/IDR regulations) of the Federal Poverty Guidelines for their family size and state.

Discretionary income differs from disposable income; disposable income is income remaining after taxes are deducted, whereas discretionary income subtracts both taxes and basic survival expenses (food, shelter, utilities), representing true surplus cash.

Quick Facts

IDR Calculation BaseAGI minus 150% or 225% of Federal Poverty Guidelines

Tax Classification RelationCalculated starting from Adjusted Gross Income (AGI)

Disposable DistinctionDisposable is after-tax; Discretionary is after essentials

Financial UtilityPrimary source of retirement savings and lifestyle choices

PRACTICAL EXAMPLE

A single taxpayer has an AGI of $50,000. If the Federal Poverty Guideline for a single person is $15,000, and their student loan repayment plan defines discretionary income as AGI exceeding 225% of that guideline ($33,750), their calculated discretionary income is $16,250 ($50,000 - $33,750).

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RELATED TERMS

Learn More Key Concepts

Gross IncomeTotal income earned from all taxable sources before subtracting any deductions, tax adjustments, or exclusions.

Net IncomeAn individual's take-home pay after tax withholdings, or a business's revenue remaining after all operating expenses and taxes.

Taxable incomeThe portion of an individual's gross income that is subject to federal income tax after all deductions are applied.

Savings RateThe percentage of an individual's or household's disposable income that is saved rather than consumed.

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