What Is a Deferment Period?

What Is a Deferment Period?

Let me explain what a deferment period really is. It's that specific time frame where you, as a borrower, don't have to worry about paying interest or repaying the principal on your loan. It also applies to callable securities, meaning the issuer can't call them back during this period.

The length of this period isn't fixed; it depends on the agreement between you and the lender or issuer. For instance, if you're dealing with a student loan, deferment might last up to three years, while municipal bonds often come with a 10-year deferment period.

Key Takeaways

Here's what you need to know upfront. A deferment period is that set time when you don't have to pay interest or principal to your lender. Keep in mind, though, that interest might still build up on some loans, getting added to your balance at the end. For callable securities, it's the window where the issuer can repurchase them at a fixed price before maturity.

How Deferment Periods Work

Deferment periods show up in various places, like student loans, mortgages, callable securities, certain options, and even insurance benefit claims. Don't mix this up with a grace period, which is just a short extension after a due date where you can pay without penalties—usually something like 15 days.

Deferments are longer, often spanning years, and they're not automatic. You'll need to apply to your lender and get approved. That's the straightforward process.

Deferment Period on Student Loans

If you're taking out loans for education, deferment is common. Your lender might approve it while you're still in school or right after graduation when money is tight. They could also grant it during financial hardships to avoid default.

During this time, interest might or might not add up. Check your terms: subsidized federal loans usually don't accrue interest, but unsubsidized ones do, and it gets capitalized—added to your principal—at the end.

Deferment Period on Mortgages

With a new mortgage, you often get a deferment on the first payment. Sign in March, and you might not pay until May. That's standard.

Forbearance is different—it's a negotiated pause to prevent foreclosure, usually for borrowers with a solid payment history. Deferment is more about the initial setup.

Deferment Period on Callable Securities

Callable securities have an option for the issuer to buy them back early at a set price. Issuers do this when interest rates drop to refinance cheaper.

To protect you as the investor, there's a deferment period where they can't call the bonds. This ensures you get your interest payments for that time.

Deferment Period on Options

European options come with a deferment for their entire life—you can only exercise them on the expiry date.

There's also the Deferment Period Option, which acts like an American option: exercise anytime, but payment waits until the original expiration.

Deferment Period in Insurance

In insurance, if you're incapacitated and can't work, benefits kick in after a deferred period. That's the wait time from when you stop working due to illness or injury until payments start.

Example of a Deferment Period

Take a 15-year bond with a six-year deferment: you get guaranteed interest for those six years. After that, the issuer might call it if rates are favorable. Municipal bonds typically have 10-year deferments.

Common Questions About Deferment

Not all student loans qualify for deferment—federal ones usually do, but private lenders vary. Interest often accrues during deferment, increasing your balance even if you're not paying. For federal student loans, deferment can last up to three years.

The Bottom Line

Deferment varies by context, but if you're struggling with a student loan, it can provide relief. For securities, it secures your interest income. Use it strategically to improve your financial situation.