Quick overview

Deferment and forbearance both provide short-term relief when you can’t make full loan payments, but they differ in who pays the interest and whether unpaid interest can be added to your principal (capitalized). Picking the wrong option can substantially increase the lifetime cost of your loan balance.

This article explains the long-term interest consequences of each option, gives numerical examples, notes effects on loan forgiveness and credit, and lists practical strategies to reduce extra costs. Sources: U.S. Department of Education (StudentAid) and Consumer Financial Protection Bureau (CFPB) (see inline citations).

How deferment works and its long-term interest effects

  • What it is: Deferment is an approved pause in required payments for eligible federal student loans for specific reasons (in-school, unemployment, economic hardship, military service, rehabilitation training, etc.). (U.S. Dept. of Education, StudentAid)
  • Interest during deferment: For Direct Subsidized Loans and Subsidized Federal Stafford Loans, the federal government pays interest during many types of deferment (so interest does not accrue on the borrower’s account). For Direct Unsubsidized Loans, PLUS loans, and most private loans, interest continues to accrue during deferment. (studentaid.gov)
  • Capitalization: If unpaid interest accrues (for unsubsidized loans), many servicers will capitalize that interest—add it to principal—when the deferment ends or if you enter a new repayment plan. Capitalization increases your principal and therefore future interest charges.

Long-term effect: If you have subsidized federal loans and qualify for a deferment type where the government covers interest, your principal stays the same and your lifetime interest cost is lower. For unsubsidized and private loans, deferment delays payments but typically increases the lifetime cost through accrued interest and possible capitalization.

How forbearance works and its long-term interest effects

  • What it is: Forbearance is a temporary suspension or reduction of payments granted at a lender’s or servicer’s discretion (general/discretionary forbearance) or for specific conditions (mandatory forbearance). Typical limits exist (e.g., up to 12 months at a time for discretionary forbearance), and servicers often require reevaluation. (CFPB)
  • Interest during forbearance: Interest accrues on all federal loans (subsidized and unsubsidized) during forbearance. For private loans, rules vary but interest almost always continues to accrue unless your contract explicitly states otherwise.
  • Capitalization: Unpaid interest from forbearance generally capitalizes when you exit forbearance (or when you enter repayment), raising your outstanding principal and the amount of interest charged going forward.

Long-term effect: Because interest accrues on all loan types during forbearance, prolonged or repeated forbearance periods almost always increase the total interest paid and can materially lengthen the repayment period if you keep making only minimum payments or defer interest.

Simple numeric examples that show the long-term impact

Example A — Subsidized loan with deferment (best case):

  • Principal: $20,000 Direct Subsidized Loan
  • Interest rate: 4.5% (fixed)
  • Deferment: 2 years of in-school deferment where interest is paid by the government
    Result: No interest accrues while deferred. When repayment resumes, principal remains $20,000 and future interest is calculated on the original principal—no extra capitalization.

Example B — Same loan but in forbearance for 2 years:

  • Principal: $20,000 at 4.5%
  • Interest accrued during 2 years: 20,000 * 0.045 * 2 = $1,800
  • If interest capitalizes, new principal after forbearance = $21,800. Year 3 interest (and beyond) is charged on $21,800—not $20,000. Over a standard 10-year amortization this can add hundreds to thousands of dollars in total interest paid.

Example C — Unsubsidized loan in deferment or forbearance:

  • Principal: $30,000 Unsubsidized at 5.0%
  • 12 months of pause: accrued interest = 30,000 * 0.05 = $1,500
  • If you do not pay that $1,500 while paused and it capitalizes, future interest accrues on $31,500. Over the remaining term, that added $1,500 causes additional interest compounding.

These simplified examples highlight how even a single year of paused payments can grow the total cost when interest accrues and capitalizes.

Effects on loan forgiveness and repayment counts

  • Public Service Loan Forgiveness (PSLF): Generally, time in deferment or forbearance does not count toward the 120 qualifying payments required for PSLF, because PSLF requires qualifying payments made under an eligible repayment plan while working full-time for a qualifying employer. (U.S. Dept. of Education)
  • Income-driven repayment (IDR) forgiveness: Certain periods of partial payment under IDR count toward forgiveness. Periods of deferment or forbearance typically do not count, although options such as “economic hardship” deferments or other programs may have exceptions—always confirm with your servicer and the Department of Education. (StudentAid.gov)

Bottom line: Using forbearance or deferment as a long-term strategy can harm your progress toward forgiveness programs; confirm which periods (if any) are creditable before relying on a pause.

Private loans: different rules, same problem

Private loans are governed by the promissory note and lender policies. Most private lenders charge interest during deferment or forbearance and capitalize interest at the end of the pause. However, some lenders offer interest-only payments, temporary reduced payments, or hardship programs—terms vary. Always get terms in writing and compare the borrower cost over the full repayment horizon.

Practical strategies to limit long-term interest damage

  1. Choose deferment over forbearance when you qualify and the deferment covers interest (e.g., Direct Subsidized in-school deferment). (StudentAid)
  2. If you must use forbearance, try to pay at least the interest each month to avoid capitalization. Even paying partial interest reduces long-term cost.
  3. Consider an income-driven repayment (IDR) plan instead of forbearance if you qualify—IDR keeps you in a repayment plan (counts toward some forgiveness rules) and may result in lower monthly obligations without interest capitalizing in the same way. (studentaid.gov)
  4. Explore consolidation carefully: consolidating federal loans can simplify payments but may change interest calculations and can affect forgiveness eligibility—consolidation may capitalize unpaid interest. See pros/cons of consolidation before acting. (U.S. Dept. of Education)
  5. For private loans, ask about hardship programs or temporary interest-only payments before accepting forbearance.
  6. Track cumulative forbearance: discretionary forbearance is often limited in total months; excessive use can lead to higher long-term costs.

Communication and documentation: how to avoid surprises

  • Request written confirmation from your servicer showing whether interest will accrue and whether unpaid interest will capitalize.
  • Ask how the pause affects repayment counts for forgiveness, rehabilitation, or loan rehabilitation programs.
  • Keep records of all forms, approvals, and correspondence.

Real-world case notes from practice

In my work as a financial advisor for clients managing student debt, I’ve observed two recurring patterns:

  • Borrowers with subsidized federal loans who secured deferment while in graduate school avoided thousands in additional interest compared with peers who chose forbearance.
  • Borrowers (federal and private) who used forbearance during extended unemployment often faced sticker shock when capitalized interest increased monthly payments and lengthened payoff timelines.

These patterns underscore that short-term relief can lead to long-term cost. Conversations with servicers and proactive planning often reduce the damage.

Related resources on FinHelp

Common mistakes to avoid

  • Assuming all deferments stop interest (only subsidized federal loans have that protection).
  • Accepting forbearance without confirming capitalization rules and the exact date of capitalization.
  • Believing that paused payments automatically preserve progress toward forgiveness programs.

Final checklist before you pause payments

  • Confirm whether your loan is subsidized or unsubsidized.
  • Ask who will pay interest during the pause and whether interest will capitalize.
  • Calculate the estimated extra cost: principal × rate × months paused ÷ 12 = interest accrued during pause.
  • Compare alternatives: IDR plans, temporary repayment reductions, hardship programs, or refinancing (for private loans).
  • Get the agreement in writing and save the confirmation.

Professional disclaimer

This article is educational and not personalized tax, legal, or financial advice. Rules change; check current guidance at U.S. Department of Education (studentaid.gov) and the Consumer Financial Protection Bureau (consumerfinance.gov), and consult your loan servicer or a licensed financial professional for advice tailored to your situation.

Sources and further reading

  • U.S. Department of Education, Federal Student Aid (studentaid.ed.gov) — loan deferment and forbearance pages.
  • Consumer Financial Protection Bureau — Managing student loan forbearance and deferment guides.