Overview
Forbearance is a temporary agreement between a borrower and a lender that allows reduced or suspended payments for a set period. While it provides short-term relief, interest typically continues to accrue on the outstanding principal unless the lender or a government program says otherwise. That accrual increases the loan balance either immediately or when accrued interest is capitalized at the end of the forbearance period.
This article explains how interest accrues during forbearance across common loan types, shows simple calculations you can use to estimate extra cost, points out policy exceptions, and offers practical strategies to limit long-term damage to your finances.
How interest accrues (simple mechanics)
Interest accrues when a lender applies the loan’s interest rate to the unpaid principal over time. During active repayment, part of each payment covers interest and part reduces principal. In forbearance:
- Regular payments are reduced or paused.
- Interest usually continues to be calculated on the unpaid principal each day or month.
- The accrued interest either accumulates as a separate balance or is capitalized (added to principal) at the end of the forbearance period.
Capitalization increases the principal that future interest is computed on, so even after you resume normal payments, a larger share goes toward interest until the higher balance is paid down.
How this looks across common loan types
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Federal student loans: Historically, certain federal relief programs (for example, COVID-era administrative forbearances) paused interest accrual for some borrowers. Those programs have ended; under ordinary federal forbearance rules, interest continues to accrue on most federal student loans and is generally capitalized when the forbearance ends unless the loan’s terms specify otherwise (U.S. Department of Education and Federal Student Aid, studentaid.gov).
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Private student loans: Interest almost always continues to accrue, and most servicers capitalize accrued interest at the end of forbearance.
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Mortgages: Mortgage forbearance (including short-term relief for hardship) generally does not eliminate interest; unpaid interest can accrue and be treated differently depending on the servicer and loan type. Government-backed programs may offer options for repayment or extensions, but interest often still accrues (Consumer Financial Protection Bureau).
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Personal, auto, and business loans: Terms vary by lender. Some lenders offer true payment deferrals that simply push due dates; others add interest and fees. Always check the forbearance agreement in writing.
Authoritative resources: U.S. Department of Education (studentaid.gov) and the Consumer Financial Protection Bureau (consumerfinance.gov) provide up-to-date guidance on loan-specific rules and borrower rights.
Examples and quick calculations
Use simple interest math to estimate accrued interest during forbearance:
Monthly interest = (annual interest rate ÷ 12) × outstanding principal
Example 1 — student loan (from practice):
- Principal: $30,000
- Rate: 5.00% annually
- Forbearance: 6 months
Monthly interest = 0.05 ÷ 12 × 30,000 = $125
Six months of accrual ≈ $125 × 6 = $750
If the servicer capitalizes that $750 at the end of forbearance, new principal = $30,750. Future interest is then calculated on $30,750 rather than $30,000.
Example 2 — mortgage snapshot:
- Principal: $200,000
- Rate: 3.50% annually
- Forbearance: 3 months
Monthly interest = 0.035 ÷ 12 × 200,000 ≈ $583.33
Three months ≈ $1,750 (rounded)
These calculations are illustrative. Some loans compound daily, which changes the exact figure slightly; servicers should provide an accrual statement or payoff quote that reflects daily interest calculation.
Capitalization: why it matters
Capitalization is when unpaid interest is added to the loan’s principal. Once capitalized:
- Your monthly payment may increase (depending on term and lender).
- More of each payment goes to interest initially, slowing principal repayment.
- Total interest paid over the life of the loan will usually increase.
Factors that influence whether interest is capitalized include the loan contract, lender policy, and whether the forbearance was part of a federal relief program.
Exceptions and special programs
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Temporary federal relief (e.g., the COVID-19 emergency relief that paused federal student loan interest between 2020–2023) was an exception — interest did not accrue while the relief order was active. Those temporary policies have ended for most borrowers; check the Department of Education for status updates (studentaid.gov).
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Some lenders or servicers may offer partial-suspension programs or interest subsidies for qualifying borrowers. Always get program terms in writing and confirm whether interest accrues.
Impact on credit and default risk
If you have a formal, documented forbearance agreement and are following it, the agreement typically prevents servicers from reporting the forbearance itself as late payment to the credit bureaus. However:
- Failure to enter a formal agreement and missing payments can damage credit.
- Accrued and capitalized interest makes future payments higher; missed payments after forbearance can lead to delinquency and default.
The Consumer Financial Protection Bureau explains borrower protections and how to communicate with servicers to avoid credit damage (consumerfinance.gov).
Tax considerations
Generally, interest that accrues during forbearance is still interest paid when you eventually pay it. Mortgage interest and student loan interest have separate tax rules. For example, student loan interest paid during the year may be deductible up to current IRS limits if you meet income and filing requirements. Consult a tax professional and IRS guidance for specifics; tax treatment can change and depends on whether interest is paid or merely accrued but unpaid in a tax year.
Practical strategies to limit cost during forbearance
- Ask whether interest continues to accrue and whether it will be capitalized. Get the answer in writing.
- If you can’t make full payments, consider making interest-only payments during forbearance to prevent capitalization and keep principal from rising.
- Compare alternatives: deferment, loan modification, income-driven repayment (for student loans), or refinancing may be cheaper than forbearance over time. See our guides on Deferment vs Forbearance: Impact on Interest and Repayment and Loan Modification vs. Forbearance: Which Helps More?.
- Create a post-forbearance cash-flow plan so you can absorb higher payments when capitalization occurs.
- If you have a federal student loan, explore income-driven repayment plans or consolidation options at Federal Student Aid (studentaid.gov) before deciding on forbearance.
When forbearance might make sense
Forbearance can be the right short-term tool if you have a temporary hardship and no other realistic way to keep making reduced payments. It protects against immediate default, foreclosure, or repossession in many cases. Use it as a bridge while you pursue longer-term solutions.
Common mistakes to avoid
- Assuming forbearance erases interest or reduces the overall debt.
- Accepting verbal assurances; always get written terms and a payoff quote showing how interest will be treated.
- Ignoring the long-term budget impact of capitalization.
Related resources on FinHelp
- What Is a Forbearance? — overview of forbearance agreements and borrower rights: https://finhelp.io/glossary/what-is-a-forbearance/
- Deferment vs Forbearance: Impact on Interest and Repayment — compares two relief types and their costs: https://finhelp.io/glossary/deferment-vs-forbearance-impact-on-interest-and-repayment/
- Loan Modification vs. Forbearance: Which Helps More? — when longer-term fixes may beat short-term forbearance: https://finhelp.io/glossary/loan-modification-vs-forbearance-which-helps-more/
Professional perspective
In my experience working with borrowers, the surprise often comes not from the forbearance itself but from the first post-forbearance statement. That’s when accrued interest shows up in full or when payments are recalculated after capitalization. When advising clients, I emphasize documenting the agreement, running simple accrual math before accepting forbearance, and, whenever possible, paying accrued interest during the forbearance window to avoid long-term cost increases.
Summary and next steps
Forbearance can be a useful short-term tool, but interest typically continues to accrue and can be capitalized—raising future payments and the total interest you pay. Before you accept forbearance:
- Confirm accrual and capitalization rules in writing.
- Calculate probable accrued interest and how it affects monthly payments.
- Compare alternatives, like deferment, repayment plans, or modification.
- Plan your post-forbearance budget and consider making interest-only payments if feasible.
Professional disclaimer: This article is educational and does not constitute personalized financial, tax, or legal advice. Consult your loan servicer and a qualified financial or tax professional about your specific situation.
Authoritative sources and recommended reading
- Federal Student Aid (U.S. Department of Education): https://studentaid.gov
- Consumer Financial Protection Bureau — Forbearance and your rights: https://www.consumerfinance.gov
- FinHelp: What Is a Forbearance? https://finhelp.io/glossary/what-is-a-forbearance/
