Future student borrowers will also get some relief from the Biden administration’s federal student loan forgiveness plan.
That relief will come in smaller and more manageable monthly payments. The plan includes cutting the rate of what people must pay from their discretionary income to student loan repayments.
What is discretionary income? Discretionary income is the money that’s left after paying taxes and essential cost-of-living expenses. It can be used however you want – to dine out, pay for streaming services or tickets to movies or sporting events, for example.
Don’t confuse that with disposable income, which is the money you have after paying only taxes. Since you haven’t paid for your basic necessities yet, disposable income is larger than discretionary income.
How would Biden’s plan shrink discretionary income?
The idea is to increase the amount of what’s considered nondiscretionary income, which is the income needed to cover necessary expenses including taxes, food and shelter and protect it from repayment.
By increasing nondiscretionary income, discretionary income shrinks. The White House says it’s “guaranteeing that no borrower earning under 225% of the federal poverty level – about the annual equivalent of a $15 minimum wage for a single borrower – will have to make a monthly payment.”
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What else is being proposed that’ll cut my monthly repayments to make them more manageable?
The other piece of relief comes from cutting the percentage of your discretionary income that determines what you pay monthly.
Borrowers would only have to pay 5%, instead of 10%, of their discretionary income each month on undergraduate loans. Those who have graduate and undergraduate loans would pay a weighted average rate.
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When will more details on the student debt relief proposal be released?
Proposed regulations will be published in the coming days on the Federal Register website and the public is invited to comment on the draft rule for 30 days.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: What’s discretionary income? How it applies to Biden student loan plan
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