Overview

Loan forbearance gives short-term breathing room by pausing or lowering payments when you face hardship. But most forbearance agreements allow interest to continue accruing. That accrued interest can be added to your principal (capitalized) when forbearance ends, which raises your remaining balance and increases the interest charged for the rest of the loan term.

How interest accrues during forbearance

  • Simple accrual (most fixed-rate loans): interest continues to accumulate daily using the formula interest = principal × annual rate × (days/365). For example, $50,000 at 5% accrues about $1,250 in six months (50,000 × 0.05 × 0.5).
  • Capitalization: if the lender capitalizes accrued interest, that interest becomes part of the principal. Higher principal means higher monthly payments and more interest over time.
  • Loan-specific rules: federal student loans, private student loans, mortgages, and business loans treat accrual and capitalization differently — always read the forbearance agreement.

Real costs and long-term impact

  • Short-term relief vs long-term cost: pausing payments can prevent default and immediate hardship, but it usually increases lifetime interest and may extend your repayment term.
  • Effect on monthly payments: when accrued interest capitalizes, monthly payments often rise because the amortization schedule is recalculated on a larger principal.
  • Total interest paid: even a short forbearance can add hundreds or thousands of dollars to total lifetime interest depending on balance, rate, and length of the pause.

Practical example

  • Scenario: $25,000 loan at 6% annual interest.
  • Six months of forbearance interest = 25,000 × 0.06 × 0.5 = $750.
  • If that $750 is capitalized, your new principal becomes $25,750; future interest is charged on the larger amount.

When forbearance may be preferable

  • Preventing default or foreclosure in an acute crisis.
  • Short gaps in income where immediate payments aren’t possible.
  • When other options (repayment plans, modification, refinance) are unavailable or costlier in the short run.

Alternatives and how to limit long-term interest costs

  • Income-driven repayment or extended repayment plans (student loans) can lower monthly payments without immediate capitalization — check Federal Student Aid guidance (https://studentaid.gov).
  • Loan modification may permanently change terms and sometimes reduce interest — compare options with your servicer or lender. See our guide on Loan Modification vs Forbearance: Credit Reporting and Long-Term Effects.
  • Short-term deferment vs forbearance: deferment sometimes suspends interest for certain federal loans; distinguish this in your loan documents or see our article: How Deferment and Forbearance Affect Loan Interest Accrual.
  • Ask the lender whether interest will be waived during forbearance, whether interest will be capitalized, and whether the forbearance will be reported to credit bureaus.

Credit reporting and tax notes

  • Credit reporting: properly agreed forbearance is not the same as missed payments, but some servicers report the account status; check CFPB guidance on hardship relief and credit reporting (https://www.consumerfinance.gov).
  • Tax treatment: accrued interest generally isn’t deductible until paid in some circumstances; consult IRS guidance or a tax professional for specifics.

Checklist before you accept forbearance

  1. Get the agreement in writing and confirm whether interest accrues and will be capitalized.
  2. Ask how the forbearance affects repayment term, monthly payment, and eligibility for forgiveness (if applicable).
  3. Compare total cost of forbearance vs alternatives (modification, refinance, repayment plans).
  4. Request a post-forbearance repayment projection showing new monthly payments and total interest.

Further reading and internal resources

Authoritative sources

Professional disclaimer

This article is educational and does not replace personalized financial, tax, or legal advice. Consult a certified financial planner or tax professional about how forbearance would affect your specific loans.