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What Is Deferment?

A deferment refers to a situation whereby a borrower puts a hold on repayments of the interest and principal on the loan. It also refers to a state in which an issuer of callable security cannot call the said security. The two (2) parties agree on the duration of the deferment ahead of time and establish a contract to that effect. For instance, a student loan deferment period lasts for about three(3) years, while a municipal bond may last for as long as ten years.

It refers mainly to student loans, mortgages, callable securities, benefit claims in the insurance industry, e.t.c.

Deeper Definition

Borrowers are allowed to hit the pause button and, by so doing, momentarily suspend payments for a previously agreed period while keeping their accounts in good standing through this arrangement.

It is different and could be mistaken for forbearance or a ‘grace period’ as will be established subsequently.

Grace periods are short periods, usually about 15 days, after the due date without the risk of late fees or cancellation of the loan or contract.

In the case of a federal forbearance, the significant difference is that interest always accrues while interests are not charged on deferments in some cases.

Also, qualification for a deferment is hardly turned down as servicers are obligated to grant them, unlike a forbearance which is at the loan servicer’s discretion- but mandatory in some cases.

Worthy of note also is that deferments have differing time lengths, depending on the terms of the agreement, unlike a forbearance which typically lasts for 12 months.

Interests do not accrue on Direct Subsidized Loans, Subsidized Federal Stafford Loans, Perkins Loans, and the subsidized portions of Direct Consolidation Loans and FFEL Consolidation Loans.

The option of deferred payments is available to those terminally ill, serving in the Peace Corps, on active-duty or post-active-duty military service, enrolled in an approved rehabilitation program, unemployed, and unable to obtain full-time gainful employment e.t.c.

Viable alternatives to deferment include income-driven repayment, student loan refinancing, budget restructuring e.t.c.

Deferment Example

A bond issued with 20 years to maturity may have a deferment period of 7 years.

This implies that investors are guaranteed regular periodic interest for at least seven years.

Beyond this period, the issuer may choose to buy back the bonds depending on prevailing market rates.

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