Increasing your retirement savings is not only a good way to save for the future, but for federal borrowers on income-driven repayment plans, it can also lower your monthly student loan bill.
For borrowers on income-driven repayment plans, monthly payments are calculated as a percentage of discretionary income. Discretionary income is the amount of taxable income that exceeds 150% of state and family size poverty guidelines. According to the Department of Health and Human Services, this equates to $23,475 per individual (not living in Hawaii or Alaska) in 2025.
With an income-driven repayment plan, your discretionary income is taxable income above 100% of the poverty guideline, or $15,650 for an individual in 2025.
401(k)s, individual retirement accounts, and other retirement plans are funded with pre-tax dollars, so the more you contribute, the lower your taxable income. Therefore, your monthly student loan payments will be lower. And you can contribute even more to many of these accounts next year.
Eligible workers will be able to contribute up to $24,500 to 401(k), 403(b) and other employer-sponsored retirement accounts in 2026, up from $23,500 in 2025, the Internal Revenue Service announced Nov. 13.
IRA contribution limits will also increase by $500 starting in 2025, up to $7,500 for eligible participants. Workers age 50 and older can contribute an additional $8,000 to a 401(k) plan and an additional $1,100 to an IRA.
As for how much it affects your student loans, your monthly payments are calculated as a percentage of your discretionary income, depending on your plan and when you took out your loans.
IBR (for loans disbursed before July 1, 2014): 15%IBR (for loans disbursed after July 1, 2014): 10%ICR: 20%PAYE: 10%
how much can you save
For a single borrower who took out a loan before July 1, 2014, has no children, has an annual income of $75,000, and takes the standard deduction of $16,100 in 2026, the discretionary income would be $35,425. Your monthly student loan payment at IBR will be approximately $443.
However, if that borrower contributed up to $24,500 to a 401(k), that discretionary income would drop to $10,925, reducing the monthly payment to about $137.
Of course, contributing more to a retirement account may not be feasible for everyone. But for some people, smaller student loan payments can be a beneficial trade-off.
Also keep in mind that lower monthly payments can keep you in debt for longer because interest continues to accrue and the principal balance doesn’t reduce as quickly as higher payments. However, a borrower who has made qualifying payments under an IDR plan may be eligible to have the remaining balance forgiven after 20 or 25 years, depending on the plan and when the loan was originated.
The best course of action for you will depend on your personal financial situation and goals. You can use the Federal Student Aid Loan Simulator tool to see what different repayment options look like.
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