In the sentences below:
'It's only a suggestion.'
'That's only a suggestion.'
I was told by most people that they could be used interchangeably, but I believe they exist for some reason that yet to be found out.
How do you differentiate them?
You can use either "it" or "that" to refer to the thing that has just been written or talked about. The usage of the former is more common; however, the latter is more emphatic.