What Is a Deferment on a Loan and Should You Get One?

A loan deferment offers a temporary pause in financial obligations, allowing borrowers to suspend or reduce their regular payments. This arrangement provides relief during specific periods of hardship or significant life changes, helping individuals manage their finances without defaulting on their loan commitments.

Understanding Deferment

Deferment is a formal agreement between a borrower and a lender or loan servicer to temporarily suspend or reduce loan payments without the obligation being considered in default. This temporary suspension is typically available for various types of loans, including student loans and personal loans. During a deferment period, borrowers are not required to make monthly payments.

The duration of a deferment period can vary, ranging from a single month to several years, depending on the loan type and lender’s policies. Interest may continue to accrue on the loan balance during this time, impacting the total amount repaid. Whether interest accrues often depends on the type of loan and the specific deferment program.

Common Reasons for Deferment

Eligibility for loan deferment typically depends on specific circumstances and the type of loan. A common reason for deferment is in-school enrollment, where federal student loan borrowers generally qualify if they are enrolled at least half-time at an eligible educational institution.

Unemployment also frequently qualifies individuals for deferment, often requiring proof of receiving unemployment benefits or actively seeking full-time employment. This deferment may last for up to three years. Economic hardship deferment is another option for those experiencing financial difficulties, such as receiving means-tested government benefits or having an income below 150% of the poverty guideline for their family size.

Active duty military service can also lead to deferment, covering the period of service and sometimes an additional grace period following its completion. For those facing significant health challenges, a cancer treatment deferment may be available during treatment and for a period afterward. Borrowers enrolled in approved graduate fellowship programs or rehabilitation training programs may also qualify for deferment.

How to Apply for Deferment

The process for requesting a loan deferment begins with direct contact with your loan servicer or lender. This initial outreach helps you understand the specific deferment options and eligibility requirements. Borrowers should explain their circumstances and inquire about the necessary forms and documentation.

Once the appropriate deferment request form is identified, it must be completed. This form will typically require personal information and details about the reason for the deferment request. Along with the completed form, borrowers must gather and submit supporting documentation that verifies their eligibility, such as proof of enrollment, unemployment benefits, or income verification.

Submission methods vary, including mailing documents, uploading them through an online portal, or sending them via fax. Continue making regular payments until official notification of deferment approval is received, as stopping payments prematurely could lead to delinquency. After submission, anticipate a processing period and follow up with your servicer to confirm receipt and approval.

Financial Implications of Deferment

While deferment provides temporary relief from loan payments, it carries financial implications that can affect the overall cost of the loan. Interest accrual during the deferment period is a key factor. For some loan types, such as federal subsidized student loans and Perkins Loans, interest may not accrue, meaning the loan balance remains unchanged. However, for most other loan types, including unsubsidized federal student loans, PLUS Loans, and private loans, interest typically continues to accrue.

When interest accrues but is not paid during deferment, it may be capitalized, meaning the unpaid interest is added to the principal balance of the loan once the deferment period ends. This capitalization increases the total principal owed, leading to higher interest charges over the remaining life of the loan and a larger overall repayment amount. The repayment term is also often extended by the length of the deferment period to accommodate the paused payments.

Properly arranged deferment generally does not negatively impact a borrower’s credit score, unlike missed payments or default. Lenders may report the account’s deferred status to credit bureaus, but this reporting itself does not directly harm credit scores. However, the increased total debt due to accruing interest can indirectly affect credit utilization, which is a factor in credit scoring.