A deferment is an agreement between a borrower and a lender to suspend payments during a specific amount of time. Deferments are sometimes automatic while others need to be requested. In the case of federal student loans—a common time when deferments are used—a deferment might be automatic when a student enrolls and maintains a half-time course load in a college or university degree program. In the case of requested deferments, a borrower must submit documents to prove to the lender that he/she is unable to make the required payments at that time.
When Should I Request a Deferment?
There are many reasons someone might request a deferment; for example, a college graduate who just left school and has low or no income yet to afford student loan payments yet. Student loan deferments for subsidized loans freeze the interest as well, so it is not added to the balance. However, interest still accumulates on unsubsidized loans when they are deferred and will be added to the balance. Forbearance is like deferment, but interest continues to accrue on the balance during forbearance.
There are three main reasons why deferments are requested (and granted):
- Unemployment, which is defined as not being able to find a job of at least 30 hours per week for a period of at least three months.
- Economic hardship, such as borrowers who receive federal or state public assistance, serve in the Peace Corps, or work full-time but earn less than federal minimum wage or are under 150 percent of the poverty line (for the borrower’s family size). There is a three-year limit for an economic hardship deferment.
- Military deployment. Borrowers can defer their loan payments for the duration of their service when called to active duty in the armed forces, military operations, or national emergencies.
An example of this is Steve. Steve was recently laid off from his job where he received an annual salary of $50,000. This allowed him to pay all his bills and loan payments. However, upon losing his job, Steve is unable to find another well-paying job quickly. He begins to work part-time waiting tables at a restaurant. While he was promised 40 hours per week at the restaurant, he is sent home several nights when the establishment isn’t busy, resulting in less than 20 hours per week worked at minimum wage.
Steve is having a hard time making ends meet because his take-home pay was significantly reduced. His monthly loan payments are coming due, but he does not have the money to cover them. Steve then submits copies of his new paystubs to his lenders which show that he was let go from his job and is experiencing economic hardship. His lenders agree to a deferment of payments for several months, after which, they will evaluate Steve’s situation again.
The deferral will allow him to cut expenses by several hundred dollars per month until he is able to replace his lost income. The deferment will also allow him some peace of mind instead of falling into the cycle of debt to cover the monthly shortfall.