Quick answer
Deferment and forbearance both provide temporary relief when you can’t make full loan payments, but they differ mainly on interest. For eligible federal subsidized student loans, deferment can stop interest from accruing. Forbearance almost always allows interest to accrue on the outstanding balance. That interest can be added to your principal (capitalized) at the end of the relief period, increasing future monthly payments and total cost. (Sources: CFPB, Federal Student Aid.)
Why this distinction matters
Small differences in how interest is handled can change a manageable short-term pause into much larger long-term costs. If interest continues to accumulate during a 12-month forbearance, you’ll owe that interest later — often with interest-on-interest — which can extend your repayment term and increase monthly payments after the relief ends.
In my practice working with borrowers for over a decade, I’ve seen clients take forbearance thinking it was a free pause. Months later they were surprised when interest capitalization raised their balance and monthly payment significantly. Understanding the mechanics up front avoids that shock.
How deferment works (details)
- What it does: Temporarily postpones required payments for an approved reason and period.
- Typical eligibility (federal student loans): enrollment in school at least half time, economic hardship, unemployment, military service, or certain rehabilitation periods for borrower defense; eligibility varies by loan type. See Federal Student Aid for current rules.
- Interest treatment: For federal subsidized loans, the government may pay interest during deferment; for unsubsidized federal loans and most private loans, interest usually continues to accrue.
- Reporting and credit: An approved deferment does not automatically count as a missed payment and generally won’t damage credit if reported correctly by the servicer. (Source: CFPB.)
For more on student-specific deferment rules, see our Student Loan Deferment guide: https://finhelp.io/glossary/student-loan-deferment/
How forbearance works (details)
- What it does: Temporarily reduces or suspends payments when you can’t afford the contractual amount.
- Types: Administrative forbearance (servicer-initiated), discretionary forbearance (based on borrower request), and mandatory forbearance (required when specific conditions are met for federal loans).
- Interest treatment: Interest accrues on most loan types during forbearance, including federal unsubsidized loans, private loans, and most mortgages or personal loans. That accrued interest is typically capitalized (added to principal) at the end of the forbearance period unless you pay the interest as it accrues.
- Reporting and credit: Like deferment, an approved forbearance generally does not count as a late payment; however, missed payments before approval will be reported and harm credit.
Consumer Financial Protection Bureau explains how both options work: https://www.consumerfinance.gov/ask-cfpb/what-is-forbearance-en-212/ and https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-deferment-en-213/.
Example calculations: how interest changes cost
Example A — Forbearance on a $20,000 unsubsidized student loan at 5% annual interest for 12 months:
- Interest that accrues in 12 months = $20,000 × 0.05 = $1,000.
- If interest is capitalized after the forbearance, new principal = $21,000.
- If you previously had a 10-year plan, your monthly payment increases because it’s re-amortized on the higher balance, and total interest over the life of the loan increases.
Example B — Deferment on a $20,000 subsidized federal loan at 5% for 12 months:
- Interest during the deferment is paid by the federal government (for qualifying subsidized loans), so the principal remains $20,000 and your post-deferment monthly payment and total interest do not increase for that period. (Source: Federal Student Aid.)
These simplified examples show why qualifying for deferment can be substantially cheaper than entering forbearance when interest differences apply.
Capitalization: the silent cost multiplier
Capitalization is when unpaid interest is added to the principal balance. Once capitalized, you pay interest on the higher principal going forward — sometimes called interest on interest. Capitalization commonly happens after forbearance or at the end of a deferment that doesn’t cover interest for unsubsidized loans.
Key rule of thumb: If you can, pay the accruing interest during a forbearance period to avoid capitalization. Even small periodic interest payments can reduce post-relief costs.
For a deeper look at how servicers calculate interest, see our guide on common interest calculation methods: https://finhelp.io/glossary/common-interest-calculation-methods-explained-for-borrowers/.
Eligibility and who is affected
- Federal student loan borrowers have the most clearly defined deferment/forbearance rules. Subsidized vs unsubsidized status matters for interest handling. See Federal Student Aid for official eligibility lists.
- Private loan borrowers face wide variation: some private creditors offer forbearance but rarely true deferment with interest forgiveness. Always get terms in writing.
- Mortgage lenders and servicers may offer forbearance (e.g., COVID-era relief programs), but the treatment of interest and escrow varies by servicer and loan contract.
Steps to decide and apply
- Check loan type and documentation. Identify if the loan is federal (Direct, FFEL, Perkins) or private. Loan documents and the servicer/site will list options.
- Confirm eligibility for deferment (if federal). If eligible and you have subsidized loans, deferment can be favorable.
- If deferment isn’t an option, ask about forbearance specifics: will interest accrue? Is interest capitalized? When will payments resume? What documentation is required?
- Get all terms in writing. If a servicer promises not to capitalize interest, get it via secure message or formal approval letter.
- Explore alternatives before pausing payments permanently: income-driven repayment plans, consolidation, refinancing (for private loans), or hardship programs.
If consolidation is under consideration, our article on Direct Consolidation Loans explains pros and cons: https://finhelp.io/glossary/what-is-a-direct-consolidation-loan/.
Practical strategies to limit cost
- When possible, make interest-only payments during forbearance to prevent capitalization.
- Ask about mandatory vs discretionary forbearance and whether interest will capitalize immediately or only at re-entry.
- Compare the total projected cost of forbearance vs available alternatives (income-driven repayment, deferment, refinancing).
- Keep documentation of approvals and timelines; this protects you from servicer errors that could later cause reported delinquencies.
Credit score and reporting
An approved deferment or forbearance should not be reported as a delinquency by your servicer. However, any payments missed before the approval or if the servicer fails to apply the approved status correctly may be reported and damage credit. Monitor your credit reports and loan statements during and after the relief period. (Source: CFPB.)
Common mistakes I see
- Assuming private lenders offer the same deferment protections as federal programs.
- Failing to confirm whether interest will accrue and be capitalized.
- Not documenting the servicer’s approval or timeline.
- Choosing a short-term pause without evaluating long-term cost increases.
When deferment or forbearance makes sense
- Use deferment when you qualify and you have subsidized federal loans — it generally minimizes added cost.
- Use forbearance if you need immediate relief and don’t qualify for deferment, but plan for the interest impact and budget for future payment increases.
Next steps and resources
- For federal student loan rules and current program changes, check Federal Student Aid: https://studentaid.gov/manage-loans/forbearance-deferment.
- For a plain-language explanation of your rights and options, read CFPB’s pages on deferment and forbearance: https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-deferment-en-213/ and https://www.consumerfinance.gov/ask-cfpb/what-is-forbearance-en-212/.
Professional disclaimer
This article is educational and does not constitute personalized financial or legal advice. Terms vary by loan, loan servicer, and contract. Consult your loan servicer or a licensed financial advisor for guidance tailored to your situation.
Sources
- Consumer Financial Protection Bureau — What is forbearance? and What is a loan deferment?: https://www.consumerfinance.gov/ask-cfpb/what-is-forbearance-en-212/ and https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-deferment-en-213/
- U.S. Department of Education, Federal Student Aid — Deferment & Forbearance pages: https://studentaid.gov/manage-loans/forbearance-deferment
- FinHelp.io internal guides: Student Loan Deferment: https://finhelp.io/glossary/student-loan-deferment/; Common Interest Calculation Methods: https://finhelp.io/glossary/common-interest-calculation-methods-explained-for-borrowers/; Direct Consolidation Loan: https://finhelp.io/glossary/what-is-a-direct-consolidation-loan/
If you’d like, I can add a short worksheet showing how to estimate extra cost from interest accrual during a forbearance period.
