Student loans: What to do when you owe more than your annual salary

 It’s not ideal, but it’s not an impossible situation, either.

You borrowed money to pay for school, but when it came time to start working you found that your loans add up to more than your first year’s salary. It’s not ideal, but it’s not an impossible situation, either.

Follow these tips to make your payments more manageable.

Assess your financial situation

The first step toward taking charge of your student loan debt is figuring out where you stand. For your student loans, find out how much you owe, what your interest rates are, how much of your monthly payments goes toward paying down the principal and how long you have to pay it off. Then do the same exercise for any other types of debt you have. Once you have all the information in front of you, it’ll be easier to see where your money should be going.

But before you can solely focus on paying off your student loans, registered investment advisor Tom Martin advises considering another aspect of your finances: your emergency fund. It’s how you’ll be able to handle unexpected costs, like a flat tire or a fried hard drive. As a general rule of thumb, NerdWallet advises saving three to six months’ worth of living expenses.

For Martin’s millennial clients with student loan debt, he suggests starting off by working toward a $1,000 emergency fund.

Prioritize your high-interest debt

Anyone with a large amount of student loan debt knows the weight of that debt hanging over your head can be stressful. And it’s probably tempting to throw all of your extra cash at your student loan payments.

But you may be better off using that money elsewhere. Credit cards and personal loans, for example, tend to have higher interest rates than federal student loans — think 25% or higher versus 3.4%.

“Financial advisors typically talk about the benefits of compounding interest to millennials because of their long time horizon. Carrying high-interest debt causes just the opposite. With debt, compounding is now working against you,” says Matt Hylland, a registered investment advisor based in Virginia.

Take advantage of repayment plans and forgiveness options

If you have federal loans, switching to an income-driven repayment plan can lower your monthly payments to as low as $0 per month. Plus, after 20 to 25 years, any remaining balance will be forgiven.

There are a few financial drawbacks: The forgiven amount will be taxed and your total interest payments will be higher. You also have to reapply every year. But keeping your payments manageable will help you stay on track and out of default, which can negatively impact your credit score, lead to wage garnishment, and cause your entire student loan debt to become due at once.

Another forgiveness option for federal loans is public service loan forgiveness. It’s available to those who work for a nonprofit or the government for at least 10 years and make 120 on-time payments on their loans. If you plan to sign up for PSLF, you can cut costs even further by switching to an income-driven repayment plan to lower your monthly payments.

If you’re ever having trouble making your monthly payments, contact your loan servicer to go over your options. If you have loans from a private lender, you may be able to postpone your payments for a period of time.

Live like you’re still in college

Getting that first big paycheck is cause for celebration, but you should continue to be pragmatic with your spending. That doesn’t mean you have to wipe out fun purchases altogether: Financial planner Catie Hogan advises taking a creative approach to cutting monthly costs.

“Instead of going out for an expensive night of dinner and drinks, have a dinner party where everyone contributes to the meal,” Hogan says. “So many cities now offer free community fitness and yoga, festivals, and concerts. It’s all about how resourceful you can be.”

Whatever changes you can make to cut your cost of living, know that it’ll be easier to replicate the college lifestyle when you’re fresh out of school rather than when you’ve spent months living at or above your means. So the sooner you make those adjustments, the easier it’ll be.

Use deferment and forbearance as a last resort

If your student loan payments are too high and you’ve exhausted all other options, look into getting a deferment or forbearance on your loans while you get your finances in order.

Both deferment and forbearance will allow you to postpone your student loan payments, but only deferment on federal loans allows you to do so interest-free; the government pays the interest on subsidized federal direct loans and Perkins loans when they’re in deferment. If you don’t qualify for deferment, you may be able to put your loans into forbearance instead, but interest will continue to accrue. For private loans, contact your student loan servicer to see if deferment or forbearance is an option.

If your financial situation is more secure before you come out of deferment or forbearance, consider paying off any accrued interest before your regular payments begin. That way you’ll avoid having that interest capitalized, or added to your principal balance, and save money in the long run.

Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email: ddelfino@nerdwallet.com. Twitter: @devondelfino.

This article first appeared in NerdWallet.