Deferment
Deferment
Deferment is a temporary postponement of a required payment or financial obligation, granted by a lender or creditor under specific circumstances. During a deferment period, the borrower is not required to make scheduled payments, providing short-term financial relief without immediately damaging their credit standing or triggering default penalties. Deferment is most commonly associated with student loans, but it can also apply to mortgages, auto loans, and other forms of debt.
It is important to understand that deferment does not erase or reduce the amount owed. In most cases, the debt continues to exist and may even grow larger during the postponement period, depending on how interest is handled under the terms of the agreement.
How Deferment Works
When a borrower applies for deferment, the lender reviews their situation and determines whether they qualify based on the loan terms and applicable policies. Common qualifying circumstances include:
- Enrollment in school at least half-time
- Unemployment or active job searching
- Economic hardship or financial difficulty
- Active military service or deployment
- Participation in a rehabilitation or disability program
If approved, the lender suspends the payment requirement for a defined period. Once that period ends, the borrower resumes regular payments, and the loan term may be extended to account for the missed payments.
Interest During Deferment
One of the most critical factors to understand about deferment is what happens to interest during the postponement period. The answer depends entirely on the type of loan involved.
- Subsidized federal student loans: The government covers the interest that accrues during an approved deferment period, so the borrower’s balance does not increase.
- Unsubsidized federal student loans and private loans: Interest continues to accumulate during deferment. If unpaid, this interest may be capitalized, meaning it gets added to the principal balance, causing the borrower to owe more than they originally borrowed.
- Mortgages and auto loans: Terms vary by lender, but interest often continues to accrue, and missed payments may be added to the end of the loan.
Deferment vs. Forbearance
Deferment is often confused with forbearance, which is another form of temporary payment relief. The key difference is that deferment is typically granted based on specific qualifying circumstances defined in the loan agreement, while forbearance is more discretionary and granted at the lender’s judgment. Additionally, with certain subsidized loans, deferment may prevent interest from building up, while forbearance almost always allows interest to accrue.
Simple Example
Suppose a recent college graduate has a federal unsubsidized student loan with a $20,000 balance and is currently unemployed. They apply for an unemployment deferment and are approved for six months. During those six months, they do not need to make loan payments. However, interest at their loan’s rate continues to accumulate on the $20,000 balance. If they do not pay that interest separately, it will be added to their principal at the end of the deferment period, leaving them with a balance higher than $20,000 when payments resume.
Deferment can be a valuable tool for managing short-term financial hardship, but borrowers should carefully read their loan terms and consider paying accrued interest during the deferment period whenever possible to avoid a larger debt burden in the future.