Quick answer
Interest usually keeps accruing in forbearance unless your lender or the loan program explicitly stops it. At the end of the forbearance period lenders commonly capitalize accrued interest (add it to principal) or require a repayment plan — both raise future interest costs. A loan modification rewrites the loan terms (rate, term, or principal treatment) and permanently changes how interest will be calculated going forward.
How interest behaves during forbearance
- Accrual: Most consumer, mortgage, auto, and private student loans continue to accrue interest during forbearance. That means interest = principal × annual rate × days outstanding still grows even if you paused payments. (See the CFPB’s guidance on hardship options for borrowers.) (Consumer Financial Protection Bureau).
- Capitalization: Lenders may capitalize accrued interest at the end of forbearance; capitalized interest becomes part of the principal and then itself accrues interest. That raises monthly payments or lengthens repayment if the payment amount is recalculated.
- Service differences: Some federal programs (temporary pandemic-era pauses) suspended interest for specific loans, but those were program-specific and have ended for most federal student loans. Always confirm program status with your servicer or the Department of Education (studentaid.gov).
Simple example (mortgage)
- Original loan: $250,000 at 4% fixed interest.
- Forbearance: 6 months with payments paused.
- Interest accrued: 250,000 × 0.04 × (6/12) = $5,000.
- Result: Lender either (a) adds $5,000 to the principal (new balance $255,000) or (b) requires you to repay the $5,000 separately through a lump sum or extended payment plan — both increase your total cost.
What happens with a loan modification
- Rate change: The lender may lower or raise the interest rate. A lower rate generally reduces monthly payments and total interest, but not always — if the lender also extends the loan term the borrower may pay more interest over time.
- Term and amortization: Extending the term reduces monthly payments but increases the total interest paid. Shortening the term raises monthly payments but reduces long‑run interest.
- Principal adjustments: Some modifications include principal forbearance (a portion of principal not charged interest immediately) or principal write-downs — these change the principal on which future interest is calculated.
Practical, real‑world notes from my practice
- I’ve seen borrowers avoid thousands in extra interest simply by paying the interest that accrues during short forbearance periods. If you can make interest-only payments while paused, you prevent capitalization.
- For borrowers who cannot pay accrued interest, insist on an amortization schedule showing post‑forbearance payment amounts and any capitalization events before you agree.
What to ask your lender (short checklist)
- Will interest continue to accrue during forbearance? If yes, at what rate?
- Will accrued interest be capitalized? When and how will it be applied?
- Are interest-only payments allowed during forbearance to avoid capitalization?
- If accepting a modification: ask for a written amortization schedule, total interest over the life of the modified loan, and whether any principal is being deferred or forgiven.
Strategies to limit long‑term cost
- Make interest‑only payments while in forbearance if possible — this prevents capitalization.
- Compare a modification’s monthly payment to its lifetime interest using an amortization schedule before signing.
- Consider short-term forbearance only for temporary crises; pursue modification or refinancing for long-term affordability.
Common misconceptions
- Myth: “Forbearance means no interest.” Not usually true. Most agreements let interest keep accruing unless the lender or a specific program states otherwise.
- Myth: “Forbearance automatically hurts credit.” If you enter a documented forbearance agreement before missed payments, many servicers will not report it as a default. Confirm with the servicer and get terms in writing (CFPB guidance).
Further reading and internal resources
- For details on how accrued interest may be added to your balance, see our article on how interest capitalization works during forbearance and deferment periods: “How Interest Capitalization Works During Forbearance and Deferment Periods” (https://finhelp.io/glossary/how-interest-capitalization-works-during-forbearance-and-deferment-periods/).
- To learn how forbearance affects long-term loan cost, read: “How Loan Forbearance Impacts Long-Term Interest Accrual” (https://finhelp.io/glossary/how-loan-forbearance-impacts-long-term-interest-accrual/).
- Before you sign anything, review “What a Forbearance Agreement Should Include to Protect You” for checklist items to request from your servicer (https://finhelp.io/glossary/what-a-forbearance-agreement-should-include-to-protect-you/).
Authoritative sources
- Consumer Financial Protection Bureau — resources on hardship options and servicer obligations: https://www.consumerfinance.gov/
- Federal Student Aid (U.S. Department of Education) — current status of federal student loan payment and interest policies: https://studentaid.gov/
Professional disclaimer
This content is educational and not individualized financial advice. Rules and programs can vary by loan type and servicer; consult your loan servicer or a qualified financial advisor to understand how forbearance or modification will affect your specific loans.
