Overview

When you enter forbearance, lenders often allow temporary payment relief while interest continues to accrue on most loans. If that unpaid interest is later “capitalized,” it becomes part of the principal balance — and future interest is calculated on this higher amount.

How interest accrues and when it’s capitalized

  • Interest accrues during forbearance on most unsubsidized federal student loans, private student loans, mortgages, and most personal loans. (Exceptions: some subsidized federal loans or special administrative programs.)
  • Capitalization timing varies: it can occur at the end of the forbearance period, when a loan enters repayment, at consolidation, or when a borrower leaves an administrative relief program. Check your servicer’s policy for the exact trigger. (Consumer Financial Protection Bureau; U.S. Department of Education)

Simple way to estimate accrued interest

  • Formula: Accrued interest ≈ principal × annual interest rate × time in years.
  • Example: $40,000 × 5% × 1 year = $2,000 accrued interest. If capitalized, the new principal becomes $42,000 and future interest is calculated on that amount.

Practical steps to manage and limit capitalization

  1. Ask your servicer exactly how they handle interest during forbearance and when capitalization will occur. Get dates and written confirmation.
  2. Pay the interest while in forbearance if you can. Even small monthly interest payments stop interest from compounding.
  3. Request interest-only payments or a temporary reduced schedule when available—this prevents capitalization but keeps the account in good standing.
  4. Consider alternatives to forbearance: deferment (if your loan qualifies), income-driven repayment plans for federal loans, consolidation, or loan modification for mortgage borrowers. See related guidance on Student Loan Forbearance vs Deferment: Practical Differences and Choosing Between Interest Capitalization and Payment Suspension During Forbearance.
  5. If you have private loans, compare servicer policies and shop refinancing only if qualifying terms and credit help lower long-term cost.

Questions to ask your servicer (ask for answers in writing)

  • Will unpaid interest be capitalized? When and under what condition?
  • Can I make interest-only payments during forbearance?
  • How will capitalization affect my monthly payment and repayment term?
  • Will the forbearance be reported to credit bureaus and how?

Common mistakes I see in practice

  • Assuming forbearance stops interest. Often it does not; unpaid interest can compound into principal. In my practice, clients who could afford even small interest payments avoided large post-forbearance balance jumps.
  • Not getting written confirmation of capitalization policy. Verbal promises are easy to forget.

When capitalization is not automatic

  • Some federal programs or temporary administrative relief (such as past pandemic-era pauses) temporarily stopped interest accrual or prevented capitalization. Those programs are time-limited and rules change — always verify current federal guidance at the U.S. Department of Education and the CFPB.

Example comparison (hypothetical)

  • Scenario A: $40,000 loan at 5% for 12 months in forbearance. Interest accrues $2,000. If capitalized, new balance = $42,000.
  • Scenario B: Same loan but borrower pays $167/month of interest during relief (approximate). Principal stays $40,000 and no capitalization occurs; future interest cost is lower.

Further reading and internal guides

Authoritative resources

  • Consumer Financial Protection Bureau — information on forbearance, interest, and capitalization (CFPB).
  • U.S. Department of Education — federal student loan rules and repayment options (ED).

Professional note and disclaimer

In my practice advising borrowers for 15+ years, proactively addressing accruing interest during short-term relief has saved clients thousands in long-term interest. This article is educational and not a substitute for personalized financial or legal advice. Contact your loan servicer and, if needed, a certified financial planner or attorney for advice tailored to your situation.