what is a deferment period 
the deferment period is a time during which a borrower does not have to pay interest or repay the principal on a loan the deferment period also refers to the period after the issue of a callable security during which the issuer can not call the security the duration of a deferment period can vary and is established in advance usually by a contract between the two parties a student loan deferment for example is usually for up to three years while many municipal bonds have a deferment period of 10 years understanding deferment periodsthe deferment period applies to student loans mortgages callable securities some types of options and benefit claims in the insurance industry borrowers should be careful not to confuse a deferment period with a grace period a grace period is a length of time after a due date that a borrower can make a payment without incurring a penalty grace periods are usually short windows of time such as 15 days when a borrower can make a payment beyond the due date without the risk of late fees or cancellation of the loan or contract deferment periods are usually longer time frames such as years in most cases deferments are not automatic and borrowers will need to apply to their lender and receive approval for a deferment deferment period on student loansthe deferment period is common with student loans that borrowers take out to pay for educational expenses the lender of a student loan may grant the deferment while the student is still in school or just after graduation when the student has few resources to repay the loan the lender may also grant deferment at their discretion during other periods of financial hardship to provide the borrower with temporary relief from debt payments and as an alternative to default 1during a loan s deferment period interest may or may not accrue borrowers should check their loan terms to determine whether a loan deferment means they will owe more interest than if they did not defer the payment for most subsidized deferred student loans interest does not accrue however interest does accrue on unsubsidized deferred student loans additionally the lender will capitalize the interest meaning that the interest is added to the amount due at the end of the deferment period 2deferment period on mortgagesusually a newly established mortgage will include a deferment of the first payment for example a borrower who signs a new mortgage in march may not have to start making payments until may forbearance of a mortgage differs from a deferment forbearance is an agreement negotiated between the borrower and the lender to temporarily postpone mortgage payments rather than having a property go into foreclosure lenders are more likely to grant forbearance to those borrowers who have a good history of making payments 3deferment period on callable securitiesdifferent types of securities may have an embedded call option allowing the issuer to buy them back at a predetermined price before the maturity date these securities are referred to as callable securities an issuer will typically call bonds when prevailing interest rates in the economy drop providing an opportunity for the issuer to refinance its debt at a lower rate however since early redemption is unfavorable to bondholders who will stop receiving interest income after a bond is retired the trust indenture will stipulate a call protection or a deferment period the deferment period is the period of time during which an issuing entity cannot redeem the bonds the issuer cannot call the security back during the deferment period which is uniformly predetermined by the underwriter and the issuer at the time of issuance 4deferment period on optionseuropean options have a deferment period for the life of the option this means they can be exercised only on the expiry date another type of option called the deferment period option has all the characteristics of an american vanilla option the option can be exercised anytime before it expires however payment is deferred until the original expiration date of the option deferment period in insurancebenefits are payable to the insured when they become incapacitated and are unable to work for a period of time the deferred period is the period of time from when a person has become unable to work until the time that the benefit begins to be paid it is the period of time an employee has to be out of work due to illness or injury before any benefit will start accumulating and any claim payment will be made 5example of a deferment perioda bond issued with 15 years to maturity may have a deferment period of six years this means investors are guaranteed periodic interest payments for at least six years after six years the issuer may choose to buy back the bonds depending on interest rates in the markets most municipal bonds are callable and have a deferment period of 10 years 