What Is Loan Deferment and How Does It Work?

Loan deferment offers a temporary solution for borrowers to pause their loan payments. This financial tool provides relief during specific periods, allowing individuals to navigate challenging circumstances without falling behind on financial obligations. It helps borrowers maintain good standing with their lenders.

What Deferment Means

Deferment allows a borrower to temporarily stop making scheduled payments on a loan. During this period, the loan remains active, but regular payments are suspended. This temporary pause is typically granted by the lender under specific, predefined conditions, and it is not an automatic right for all borrowers.

While payments are paused, the loan balance remains outstanding. The duration of a deferment period can vary depending on the loan type and qualifying situation. This measure helps borrowers avoid delinquency and negative impacts on their credit history.

Situations Where Deferment Applies

Loan deferment is available for various loan types under specific conditions. For federal student loans, qualifying scenarios include:
Enrollment in school at least half-time
Unemployment
Economic hardship
Military service
Participation in a graduate fellowship program
Undergoing cancer treatment

For mortgages, deferment may be an option during natural disasters or certain financial hardships, often as part of a loan modification program. While “forbearance” is more common for mortgage payment pauses, some mortgage programs offer deferment where missed payments are added to the end of the loan term. Eligibility requires meeting the lender’s criteria and providing documentation.

Financial Implications of Deferment

While deferment provides immediate relief, it has important financial implications, particularly how interest accrues. For federal subsidized student loans, interest generally does not accrue during deferment, meaning the loan balance does not increase. The Department of Education typically pays this interest.

However, for unsubsidized federal student loans, private student loans, and most other loan types, interest continues to accrue. If unpaid, this accrued interest can be capitalized, meaning it is added to the principal balance when deferment ends. This results in a larger outstanding balance, increasing the total loan cost and potentially extending the repayment term. For example, a $30,000 unsubsidized loan at 6% interest could accrue $1,800 in interest over a year of deferment, which, if capitalized, would increase the principal balance and lead to higher overall payments.

Deferment Compared to Forbearance

Deferment and forbearance are both options that allow borrowers to temporarily suspend loan payments, but they differ significantly in eligibility requirements and, more importantly, how interest is handled. Deferment is usually granted based on specific, defined circumstances, such as active enrollment in school, military service, or unemployment. In contrast, forbearance is typically granted for broader financial difficulties or medical expenses, often at the lender’s discretion, and may have less stringent eligibility criteria.

The most notable distinction lies in interest accrual. During a deferment, interest may not accrue on certain loan types, particularly federal subsidized student loans, where the government covers the interest. However, during forbearance, interest almost always accrues on all loan types, regardless of whether the loan is subsidized or unsubsidized. This difference means that while both options pause payments, a forbearance period will nearly always result in a higher total loan cost due to accumulating interest, which can also be capitalized onto the principal balance.