Quick answer

A forbearance agreement pauses or lowers required payments for a set time, but it usually does not stop interest from accruing. That accrued interest either adds to your principal (capitalizes) or becomes a separate balance you must repay—either way, your total owed amount typically grows unless your lender specifically waives interest (rare outside special programs).

What happens to principal and interest during forbearance

  • Interest accrues: Most private and many federal loans continue to accrue interest during forbearance. Use the simple formula: additional interest ≈ outstanding balance × annual rate × (days paused ÷ 365). For monthly approximations: monthly interest ≈ balance × (annual rate ÷ 12).
  • Capitalization vs. deferred interest: Lenders can capitalize accrued interest at the forbearance end (adding it to principal) or require repayment of accrued interest separately. Capitalization increases future monthly payments and total interest costs because you pay interest on a larger balance.
  • Loan type matters: Mortgage servicers, private lenders, and federal loan programs handle forbearance differently. Some government relief programs have temporarily suspended both payments and interest (e.g., past federal student loan pauses), but those are exceptional and time-limited.

Short example

If you have a $300,000 mortgage at 4.00% annual interest, one month of interest ≈ $300,000 × 0.04 ÷ 12 = $1,000. A three-month forbearance could add about $3,000 in interest. If the servicer capitalizes that interest, your new principal becomes $303,000 and future payments (or the amortization schedule) will change accordingly.

Typical repayment outcomes after forbearance ends

  • A lump-sum due for missed payments and accrued interest.
  • A repayment plan that spreads missed amounts over several months.
  • Extension of the loan term or modification to lower monthly payments (may increase overall interest paid).
  • Capitalization of accrued interest into principal.
    Which option you get depends on the lender, loan contract, and local rules.

Credit reporting and defaults

Entering a documented forbearance itself is usually not a reportable late payment if the lender and borrower have a signed agreement. However, any late payments posted before the agreement can still affect credit. Check guidance from the Consumer Financial Protection Bureau (CFPB) for how servicers handle reporting (Consumer Financial Protection Bureau: https://www.consumerfinance.gov).

Tax and legal notes

Interest that accrues during forbearance is generally not taxable income to you; it’s added to your debt. There can be tax implications if a lender later forgives part of the debt—consult a tax pro or IRS guidance in that scenario.

How to prepare and questions to ask before accepting forbearance

  1. Will interest continue to accrue? If yes, at what rate and how will it be handled at the end?
  2. Will accrued interest be capitalized or billed separately?
  3. What repayment options will be available when the pause ends? Lump sum, extended term, or payment plan?
  4. Will the forbearance be reported to credit bureaus?
  5. Are there alternatives (temporary payment reduction, loan modification, refinancing)?

Professional tips (from my practice)

  • Ask for the agreement in writing and get a clear payoff illustration showing how your monthly payment and loan term change under each end-of-forbearance option.
  • If possible, pay accrued interest during the forbearance to avoid capitalization—paying just the interest keeps your principal unchanged.
  • Compare a short forbearance to a loan modification. Sometimes a modification (permanent change to terms) is cheaper long-term than repeated forbearances; see our guide on Loan Modification vs Forbearance: Choosing the Better Option.

Common mistakes borrowers make

  • Assuming interest stops during forbearance.
  • Failing to ask whether interest will be capitalized.
  • Not budgeting for larger payments or a lump-sum when the pause ends.

Where to learn more

Authoritative sources and next steps

Professional disclaimer: This content is educational and not personalized financial or legal advice. For decisions about your loan, review your loan documents and speak with your loan servicer, a qualified financial advisor, or an attorney.