What Is a Deferment and How Does It Work?

A deferment offers a temporary pause in loan payments, providing financial relief during specific life events. This option is common in personal finance, particularly for obligations like student loans and mortgages. It is important to understand that deferment does not forgive the loan balance. Instead, it temporarily suspends the requirement to make regular payments on the principal and, in some cases, the interest.

What Deferment Means

Deferment allows a borrower to temporarily stop making payments or significantly reduce their payment amount for a defined period. This flexibility is often available for various loan types, including student loans and mortgages. While payments are paused, whether interest continues to accrue depends on the specific loan type and deferment program. Accrued interest can be added to the principal balance at the end of the deferment period.

A deferment differs from forbearance, another option for payment relief. While both temporarily suspend payments, deferment is typically tied to specific qualifying events and, for some federal student loans, can prevent interest from accruing. Forbearance, conversely, generally involves interest accruing on all loan types during the paused payment period.

Qualifying for Deferment

Borrowers typically qualify for deferment based on specific circumstances that demonstrate a temporary inability to make payments. Common grounds for eligibility include enrollment in school at least half-time, unemployment or seeking employment, economic hardship, or active military service. Individuals may also qualify due to certain types of disability or participation in a rehabilitation program. Each deferment type has specific criteria, varying by loan type and servicer policies.

To prove eligibility, borrowers need to gather documentation. Those in school may need enrollment verification, while unemployed individuals might provide statements of unemployment benefits or proof of job search activities. Economic hardship deferments often require documentation of income and household size, such as tax returns or pay stubs. Military service deferments typically necessitate official military orders or statement from a commanding officer.

The Deferment Application Process

Initiating a deferment requires contacting the loan servicer or lender to discuss available options and obtain the necessary application forms. Borrowers should communicate their situation and inquire about potential deferment types. The servicer will provide specific forms tailored to the loan type and the reason for the deferment request.

Once the forms are obtained, they must be completed and submitted with all required supporting documentation. This documentation, such as proof of enrollment or income, substantiates eligibility. After submission, the loan servicer will review the application, a process that can take several weeks. Borrowers may receive requests for additional information before a final decision.

What Happens During Deferment

During a deferment period, regular loan payments are temporarily suspended, providing financial relief. Interest accrual is a key financial implication. For federal subsidized student loans, interest generally does not accrue during deferment. However, for unsubsidized federal student loans and most private loans, interest continues to accrue throughout the deferment period.

When interest accrues during deferment, it may be capitalized at the end of the deferment period. Interest capitalization means the unpaid accrued interest is added to the principal balance of the loan, which increases the total amount owed. This can lead to a higher total repayment amount. Borrowers should track their deferment end date to prepare for resuming payments.