Overview

Forbearance is a temporary arrangement between a borrower and a lender that allows reduced or paused payments for a defined period. It’s a useful tool during job loss, medical emergencies, or other short‑term hardship. However, for most loan types, the key tradeoff is that interest usually continues to accrue during the forbearance period and may be capitalized (added to the outstanding principal) when the relief ends. That capitalization increases the balance that will then earn interest, raising long‑term costs.

This article explains how interest typically accrues for the major loan categories — federal and private student loans, mortgages, auto loans, and personal loans — with practical examples, common pitfalls, and strategies to limit added interest. Where rules differ by program or servicer, I note what to verify with your lender or loan servicer.

Sources: Consumer Financial Protection Bureau (CFPB) on forbearance and mortgages (https://www.consumerfinance.gov/), Federal Student Aid guidance at studentaid.gov (https://studentaid.gov/) and other servicer guidance.

How interest behaves by loan type

Federal student loans

Short answer: Unless a specific program or deferment explicitly suspends interest, interest generally accrues during forbearance — even on subsidized loans — and may be capitalized when the forbearance ends.

Details: Federal student loans include Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Perkins loans (legacy). Subsidized loans receive an interest subsidy from the federal government during certain authorized deferments (for example, in‑school deferment or some post‑active duty deferments). But forbearance is a different relief and, except for rare programmatic pauses (such as the COVID‑19 emergency payment pause, which has since ended), interest typically accrues on all loan types during forbearance. If accumulated interest is not paid during the forbearance period, many servicers will capitalize that interest at the end of the forbearance, increasing principal and future interest charges.

What to check: Confirm with your loan servicer whether the forbearance is an “administrative” or “economic” forbearance and whether interest will be capitalized. See the Department of Education’s Federal Student Aid site for current rules (https://studentaid.gov/).

Further reading: FinHelp articles on Student Loan Forbearance vs Deferment and How Accrued Interest Is Calculated During Loan Forbearance.

Mortgages (conventional, FHA, VA, USDA)

Short answer: Interest usually continues to accrue during mortgage forbearance. Lenders offer different post‑forbearance repayment options; the accrued interest may be added to the loan balance, spread over future payments, or managed with a loan modification.

Details: Mortgage servicers are required to offer loss mitigation options and, during short‑term forbearance, will typically give one of these outcomes when payments resume: a repayment plan (catch‑up over fixed months), loan modification, or reinstatement (pay the missed amount in full). Interest accrues during most forbearance periods unless the lender explicitly waives it. For government‑insured loans (FHA, VA, USDA), servicers follow agency guidance on forbearance alternatives and capitalization. The CFPB provides a good overview of mortgage forbearance rights and how servicers should handle accrued interest (https://www.consumerfinance.gov/).

Example (illustrative): If your mortgage balance is $200,000 at a 4% APR, monthly interest is roughly $667. A six‑month forbearance could add approximately $4,000 of accrued interest. If that $4,000 is capitalized, your new principal becomes $204,000 and future interest accrues on the larger balance.

Auto loans

Short answer: Auto loan interest generally accrues during forbearance, and lenders typically either add accrued interest to the principal or extend the loan term to keep monthly payments similar — both increase total interest paid.

Details: Auto loans are simple interest products in most cases: interest accrues daily on the outstanding principal. If payments are paused, interest keeps accumulating. Some lenders offer payment deferrals that push due dates or extend the term; others capitalize accrued interest. Ask whether your servicer will extend the loan term (which spreads the cost but increases total interest) or capitalize interest immediately.

Real‑world note: In my practice I’ve seen borrowers assume a one‑time skipped payment will be neutral; instead they were surprised when the loan payoff date moved and they paid several hundred dollars more in interest over the remaining term.

Private student loans and personal loans

Short answer: Treatment varies widely; most private student loans and unsecured personal loans accrue interest during forbearance and often capitalize it unless you negotiate otherwise.

Details: Private lenders and credit unions set their own forbearance policies. Some lenders offer temporary hardship programs that allow reduced payments without capitalization, while others will add unpaid interest to the principal. Terms vary by contract and lender, so get the terms in writing.

Summary table (quick reference)

  • Federal student loans: Usually accrues unless a special program applies; subsidized loans receive interest benefits in some deferments but generally not during typical forbearance (verify with servicer). (See studentaid.gov)
  • Mortgages: Interest typically accrues; servicers offer repayment options; capitalization may occur. (See CFPB guidance)
  • Auto loans: Interest continues to accrue; capitalization or term extension common. (See CFPB auto loan guidance)
  • Private student & personal loans: Policies vary; read your promissory note and get written terms.

Common misconceptions and mistakes

  • Mistake: Forbearance equals loan forgiveness. Reality: Forbearance pauses payments but does not eliminate the obligation to pay interest unless explicitly stated.
  • Mistake: All loans treat interest the same. Reality: Capitalization rules and legal protections differ by loan type and by whether the loan is federal, government‑insured, or private.
  • Mistake: Credit reporting will automatically be harmed. Reality: If the forbearance is granted and documented, servicers generally do not report payments as late during the agreed forbearance term — but confirm this with your servicer and get it in writing (CFPB guidance).

How to estimate accrued interest and the cost of capitalization

A simple formula to estimate interest accumulated during a forbearance period:

  • Daily interest = (Outstanding principal × APR) / 365
  • Accrued interest for N days = Daily interest × N

Example: $50,000 private student loan at 6% APR.

  • Daily interest ≈ (50,000 × 0.06) / 365 ≈ $8.22
  • Six months (≈182 days) accrual ≈ $8.22 × 182 ≈ $1,496

If that $1,496 is capitalized, your new principal becomes $51,496. Future monthly interest is calculated on the higher balance, and if you are on an amortizing repayment schedule, your monthly payment will increase unless the lender extends the loan term.

Rough mortgage example (to show payment impact): $200,000, 4% APR, 30‑year amortization — baseline monthly payment ≈ $954.83. Adding $4,000 of capitalized interest raises principal to $204,000; new payment at same rate and term ≈ $974.88 (≈ $20 increase). If the lender shortens the remaining term or capitalizes interest plus fees, the payment change can be larger. These are illustrative; run the specific numbers with your servicer or a loan amortization calculator.

Practical steps before you enter forbearance

  1. Ask for the terms in writing: Will interest accrue? Will it capitalize? Will servicer report to credit bureaus? Ask for exact dates and calculations.
  2. Request alternatives: Partial payments, interest‑only payments, modified repayment plans, temporary rate reduction, or for student loans consider income‑driven repayment options (federal loans). See our guide on Student Loan Forbearance vs Deferment.
  3. Budget for post‑forbearance: Model the worst‑case capitalized balance and plan how to handle the higher payment or extended term.
  4. Pay interest while in forbearance if you can: Even small payments toward accruing interest can prevent capitalization and save money.
  5. Keep documentation: Save emails, offer letters, and dated notes; confirm any oral promises in writing. Our article on How Accrued Interest Is Calculated During Loan Forbearance explains what to request from your servicer.

Negotiation and long‑term strategies

  • Refinance after recovery: If your credit and income recover, refinancing to a lower rate can reduce the cost caused by capitalized interest. For federal student loans, refinancing into a private loan removes federal protections — evaluate tradeoffs.
  • Consolidation or modification: For mortgages, a loan modification may roll accrued interest into a new schedule with fixed terms. For federal student loans, consolidation may reset capitalization timing; check Federal Student Aid rules.
  • Income‑driven plans: For federal student loans, income‑driven repayment plans can lower monthly payments and may be preferable to forbearance if you expect prolonged low income.

What I see in practice (15+ years advisory note)

Borrowers often accept forbearance under stress without fully understanding the capitalization rules. I advise clients to treat forbearance as short‑term emergency relief and to document the servicer’s promises. When possible, I recommend paying at least accrued interest during the pause to avoid principal growth. In several cases, a modest monthly interest payment during forbearance saved clients thousands over the life of the loan compared with full capitalization.

Questions to ask your servicer now

  • Will interest continue to accrue during my forbearance, and how will you calculate it?
  • If interest accrues, will it be capitalized? If so, when and by how much?
  • What are the available post‑forbearance options (repayment plan, modification, reinstatement)?
  • Will you report the forbearance to credit bureaus, and how will payments be reported?

Professional disclaimer

This content is educational and does not constitute individualized financial, tax, or legal advice. Policies and rules change; confirm current procedures with your loan servicer or a licensed financial professional. For federal student loan specifics, see Federal Student Aid (https://studentaid.gov/) and for consumer protections see CFPB (https://www.consumerfinance.gov/).

Quick resources

If you want, I can prepare a short worksheet for your specific loan balances and APRs to show projected post‑forbearance principal and monthly payment impacts. Please have your loan balance, APR and remaining term ready.