What Is Loan Deferment and How Does It Work?

Loan deferment provides a temporary period during which borrowers are not required to make payments. This allows individuals facing financial challenges to address their difficulties without risking loan default. It can be a valuable tool for managing various types of debt, from student loans to mortgages, under specific circumstances.

Understanding Loan Deferment

Loan deferment functions as a temporary suspension of scheduled loan payments. The duration of a deferment period can range from a few months to several years, depending on the loan type and the borrower’s circumstances. While payments are paused, the treatment of interest varies significantly, particularly with federal student loans.

For federal student loans, the distinction between subsidized and unsubsidized loans is important. With subsidized federal student loans, the U.S. Department of Education pays the interest that accrues during the deferment period. This means the loan balance does not increase while payments are paused. In contrast, interest continues to accrue on unsubsidized federal student loans, Direct PLUS Loans, and private student loans during deferment.

If interest accrues on a loan during deferment, borrowers can pay the interest as it accumulates. If the accrued interest is not paid, it will be added to the principal balance of the loan at the end of the deferment period, a process known as capitalization. This capitalization increases the total loan amount, leading to higher monthly payments and a greater overall cost of the loan over its lifetime. For instance, an unsubsidized loan balance of $30,000 at a 6% interest rate could see an additional $1,800 in interest after a year of deferment, which would then be added to the principal if not paid.

Qualifying for Deferment

Eligibility for loan deferment depends on the loan type and specific qualifying conditions. Many deferment options are available for federal student loans, stemming from various life circumstances. Common reasons for deferment include enrollment in school at least half-time, unemployment, or experiencing economic hardship.

Other qualifying situations for federal student loan deferment include military service or participation in an approved rehabilitation training program. Some deferments are also available for specific situations like cancer treatment or serving in a graduate fellowship. For private loans, deferment availability and criteria are determined by individual lenders and may be less standardized than federal programs. Borrowers need to provide documentation to prove eligibility for the specific deferment type they are seeking.

Deferment Compared to Forbearance

Loan deferment and loan forbearance are both temporary options to pause loan payments, but they differ significantly in how interest is handled. The primary distinction lies in interest accrual. During deferment, interest does not accrue on certain types of federal student loans, such as subsidized loans. This means the loan balance remains unchanged during the deferment period.

In contrast, interest continues to accrue on all loan types during forbearance, including federal subsidized loans. If this interest is not paid during the forbearance period, it will be added to the principal balance, increasing the total amount owed. While both options provide payment relief, deferment is more advantageous when available due to the potential for the government to cover interest costs. Forbearance is granted when a borrower does not qualify for deferment but still needs temporary payment relief due to financial difficulties.

Steps to Request Deferment

Initiating a loan deferment requires direct communication with your loan servicer or lender. First, identify the specific deferment type for which you qualify. After confirming eligibility, gather any necessary supporting documents, such as proof of enrollment, unemployment benefits, or income statements, depending on the deferment type.

Next, complete the appropriate deferment request form, which is available through your loan servicer’s website or the Federal Student Aid website for federal loans. Submitting the completed form and supporting documents to your loan servicer is the final step. It is important to continue making payments until you receive confirmation that your deferment request has been approved to avoid late fees or delinquency.