Quick overview

Deferment and forbearance both provide short-term relief when you can’t make full loan payments, but they work differently with interest. On most loans, interest continues to accrue during forbearance and on many types of deferment (especially private loans and unsubsidized federal loans). Accrued interest frequently capitalizes — that is, it’s added to the principal — which raises future interest costs and monthly payments.

This article explains how interest accrues by loan type, outlines capitalization rules and real examples, and gives practical strategies to limit added costs. Sources include the U.S. Department of Education (Federal Student Aid) and the Consumer Financial Protection Bureau (CFPB) (see links below).

How interest accrues by loan type

  • Federal student loans (subsidized vs. unsubsidized): For subsidized federal student loans, the Department of Education pays interest during authorized periods of deferment, so interest does not accrue for the borrower during that time. Unsubsidized federal loans continue to accrue interest during deferment and forbearance; that interest may capitalize later. (See studentaid.gov on deferment and forbearance.)

  • Private student loans: Private lenders generally treat any pause as forbearance — interest usually continues to accrue, and capitalization rules vary by lender. Confirm terms with the servicer.

  • Mortgages: Forbearance does not stop interest from accruing on most mortgages. Servicers may offer different resolution options (repayment plan, modification, lump sum due at end). Interest often continues during the forbearance period and can lead to higher totals if added to the loan balance.

  • Credit cards and unsecured loans: Creditors rarely grant formal deferments. During hardship accommodations or informal forbearance, interest and fees typically continue to accrue. Missed payments before an agreement are likely to hit your credit score.

Sources: U.S. Department of Education, Consumer Financial Protection Bureau.

Capitalization: why accrued interest matters

Capitalization means adding unpaid interest to the loan’s principal balance. Once interest is capitalized, future interest is charged on the larger principal — increasing total interest paid over the life of the loan.

When capitalization happens depends on the loan and the type of relief:

  • Federal student loans: Interest that accrues during a period of forbearance or after certain types of deferment may be capitalized when the borrower leaves the pause and enters repayment or consolidates loans. Exact timing is specified in federal loan rules and servicer agreements (studentaid.gov).
  • Private loans and mortgages: Capitalization rules are contractual. Some servicers add accrued interest to principal immediately at the end of the forbearance; others offer alternatives that avoid capitalization.

Example: you have a $20,000 unsubsidized student loan at 6% annual interest. If you take a 12-month forbearance and make no interest payments, interest accrues as $20,000 × 0.06 = $1,200 that year. If that $1,200 capitalizes at the end of forbearance, new principal = $21,200. Over the next year, interest will be $21,200 × 0.06 = $1,272, not $1,200 — and this difference compounds over time.

How deferment and forbearance affect loan forgiveness and payment counts

If you’re pursuing programs like Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) forgiveness, understand how paused periods count:

  • Authorized deferments and some administrative forbearances may or may not count as qualifying payments for forgiveness programs. Historically, many deferments do not count toward PSLF or IDR forgiveness, but exceptions have applied for certain administrative forbearances and policy changes. Always check studentaid.gov and your servicer’s guidance before relying on a paused period to count toward forgiveness.
  • For forbearance, months in traditional forbearance usually do not count as qualifying payments for PSLF or toward IDR forgiveness.

Because rules change and temporary relief programs may be introduced (for example, the COVID-era pauses and targeted administrative forbearances), verify current treatment of paused months on studentaid.gov or with your servicer before you stop payments.

Real-world examples and common outcomes

  • Example 1 (federal subsidized loan): A borrower with a $10,000 subsidized loan is granted a six-month authorized deferment for in-school status. The federal government pays interest during deferment, so the borrower’s balance remains $10,000 at the end of the period.

  • Example 2 (unsubsidized federal loan): Same $10,000 at 6% interest. Over six months, interest accrues ≈ $300. If capitalized, the balance becomes $10,300 and future interest is calculated on that larger amount.

  • Example 3 (private student loan): A borrower receives a private lender forbearance for 12 months. The lender capitalizes accrued interest at the end, increasing principal and monthly payments. Without paying interest during the pause, the borrower effectively borrows more — at the original rate — for the term of the pause.

  • Example 4 (mortgage forbearance): A borrower receives mortgage forbearance for three months after a job loss. Interest continues accruing; the servicer offers options including repayment plan, deferral (where past due amounts are moved to the end of the loan), or loan modification. Each outcome has different long-term costs and credit effects; read the servicer offer carefully.

Practical strategies to limit added costs

  1. Ask whether interest will accrue and when it will capitalize. Get this in writing if possible. For federal loans, see studentaid.gov pages on deferment and forbearance.
  2. If interest will accrue, try to make interest-only payments during the pause. Even small monthly payments reduce capitalization and long-term cost.
  3. Explore alternatives: income-driven repayment plans, extended repayment, or consolidation may be better than long forbearance in some cases, especially if you seek to preserve progress toward forgiveness.
  4. For mortgages, compare repayment options the servicer offers (lump-sum repayment, repayment plan, deferral to end of loan, or modification). A modification may change interest rate or term and could lower long-term cost compared with capitalization.
  5. Keep documentation of any agreement and confirm how the servicer will report your account to credit bureaus. Properly documented hardship arrangements should avoid default reporting when agreed in advance.

What to ask your servicer before agreeing to a pause

  • Will interest accrue during this deferment or forbearance? At what rate?
  • If interest accrues, when will it capitalize? Will it be added to the principal or tacked on as a separate balance?
  • Will this period count toward any loan forgiveness or repayment program eligibility?
  • How will you be reported to credit bureaus while in the pause?
  • Are there alternatives (IDR, modification, repayment plan) that better preserve long‑term costs or forgiveness eligibility?

Common mistakes and misconceptions

  • Mistake: believing all deferment stops interest. Only certain federal subsidized loans have interest paid by the government during authorized deferment.
  • Mistake: assuming forbearance protects credit by default. If you missed payments before an agreement, your credit may already be damaged; you must get a documented agreement to avoid reporting.
  • Mistake: not exploring IDR plans or loan modifications that might cost less in the long run.

Where to get authoritative help

Additional FinHelp resources:

Final checklist before you pause payments

  • Confirm whether interest accrues and will capitalize.
  • Ask whether months in the pause count toward any forgiveness program you care about.
  • Consider small interest payments during the pause.
  • Request written confirmation of all terms and how the account will be reported.

Professional disclaimer: This article is educational and does not replace personalized legal, tax, or financial advice. Rules for federal student loans and servicer practices can change; verify current policies at studentaid.gov and consumerfinance.gov or consult a qualified advisor.

References

(Author: Senior Financial Content Editor, FinHelp.io — I’ve worked with borrowers across federal and private loan types; in practice, proactively asking these questions and making interest payments during a pause are the simplest ways I’ve seen clients avoid large balance increases.)