What Does It Mean to Have a Deferred Loan?
Understand loan deferment: what it means, its financial impact, and how to apply for this temporary payment pause.
Loan deferment offers a temporary suspension of loan payments, allowing borrowers to pause monthly obligations and address financial challenges without defaulting. It is a structured arrangement with the lender to temporarily alter the repayment schedule.
Understanding Loan Deferment
Loan deferment involves a temporary postponement of loan payments through a formal agreement with a lender. During this approved period, the borrower is not required to make regular payments, and the loan remains in good standing. This differs from simply stopping payments, which can lead to delinquency or default. A deferment period can range from a few months to several years, depending on the loan type and circumstances. It is not a permanent cessation of repayment obligations.
Loan deferment is distinct from other forms of payment relief, such as forbearance, in how interest may accrue. While both options allow a temporary pause in payments, interest continues to accrue on all loan types during forbearance. For deferment, depending on the specific loan type, interest may or may not accumulate during the paused payment period. This difference can influence the total cost of the loan over its lifetime.
Common Deferment Triggers
Lenders grant loan deferments based on events impacting a borrower’s ability to make payments. One common trigger is enrollment in higher education, where student loans may be deferred while attending school at least half-time. Military service, including active duty, is another common reason for deferment, providing financial flexibility for service members during deployment or transition.
Periods of unemployment or economic hardship can also qualify borrowers for deferment. This assists individuals who have lost jobs or face financial strain. Eligibility criteria involve demonstrating a reduction in income or receiving certain government benefits. Specific programs, such as graduate fellowships or rehabilitation training, may also enable deferment for eligible participants. Eligibility conditions vary depending on the loan type, such as federal student loans versus private loans or mortgages, and the individual lender’s policies.
Financial Implications of Deferment
While deferment offers a temporary reprieve from payments, it has financial consequences. Interest accrual during deferment varies by loan type. For instance, interest does not accrue on subsidized federal student loans during deferment, so the loan balance does not increase. However, for unsubsidized federal student loans, Direct PLUS loans, and most private loans, interest continues to accrue even when payments are paused.
When interest accrues but is not paid during deferment, it can be added to the principal balance of the loan, a process known as capitalization. This means the total loan amount will be higher than the original principal after deferment. For example, if $1,800 in interest accrues on a $30,000 unsubsidized loan at a 6% interest rate over a year of deferment, and this interest capitalizes, the new principal balance would be $31,800. Future interest calculations will be based on this larger principal, increasing the total loan cost. This can also lead to higher monthly payments and may extend the overall repayment period.
Initiating a Deferment Request
To request a loan deferment, borrowers must contact their loan servicer or lender directly. This is a formal process; simply stopping payments without approval can lead to negative credit reporting and other penalties. Borrowers should continue making payments until their deferment request has been approved.
The application process involves completing forms provided by the loan servicer and submitting supporting documentation. For instance, proof of enrollment may be required for an in-school deferment, while unemployment verification or a statement of financial hardship might be necessary for other deferment types. These forms and documents are available on the loan servicer’s website or can be obtained by mail or phone. After submission, the lender will review the request and communicate their decision, including the approved deferment period and any ongoing obligations.