Interest does accrue during deferment or forbearance on nearly every kind of loan. The single meaningful exception is a Direct Subsidized federal student loan in deferment, where the Department of Education pays the interest for you. Every other federal loan, every loan in forbearance, and essentially every private debt keeps charging interest daily while your payments are paused, and that accumulated interest can add hundreds or thousands of dollars to what you owe.
The One Exception: Direct Subsidized Loans in Deferment
Direct Subsidized Loans are the only place where a payment pause is genuinely free. The Department of Education pays the interest on your behalf while you’re enrolled at least half-time, during the six-month grace period after you leave school, and during other qualifying deferment periods.1Consumer Financial Protection Bureau. What Is a Federal Direct Loan2Federal Student Aid. Get Temporary Relief: Deferment and Forbearance Your balance stays frozen at exactly what it was when the deferment started.
Two conditions matter here. The loan must be subsidized, and the pause must be a deferment, not a forbearance. Change either variable and interest starts running against you.
Everything Else Federal: Unsubsidized, PLUS, and All Forbearances
Direct Unsubsidized Loans and Direct PLUS Loans accrue interest from the day the money is disbursed, and that never stops. Not during school, not during the grace period, and not during deferment.3Federal Student Aid. Federal Interest Rates and Fees4Federal Student Aid. Student Loan Deferment You owe every dollar of interest that builds while payments are on hold.
Forbearance is worse. Interest accrues on every type of federal loan during forbearance, including subsidized loans.2Federal Student Aid. Get Temporary Relief: Deferment and Forbearance The subsidy that protects subsidized borrowers in deferment does not carry over. If you qualify for both options, deferment is almost always cheaper. Ask your servicer whether deferment is available before you accept a forbearance.
The numbers add up quickly. For the 2025–2026 academic year, undergraduate Direct Loans carry a 6.39% fixed rate, graduate unsubsidized loans charge 7.94%, and PLUS loans run 8.94%.3Federal Student Aid. Federal Interest Rates and Fees On a $30,000 unsubsidized loan at 6.39%, about $5.25 in interest accumulates every day. A twelve-month deferment on that loan adds roughly $1,917 to what you owe before your first payment resumes.
There’s also a hidden cost if you’re pursuing Public Service Loan Forgiveness. Time spent in deferment or forbearance generally does not count toward the 120 qualifying payments.4Federal Student Aid. Student Loan Deferment You accumulate interest and lose credit toward forgiveness at the same time. An income-driven repayment plan with a $0 calculated payment is usually a better choice, because those $0 months still count toward PSLF.
Capitalization Makes the Damage Worse
The interest that piles up during a pause doesn’t stay quarantined. Under certain conditions it gets folded into your principal balance, a process called capitalization. From then on, you pay interest on the larger principal, and the compounding effect inflates the total cost of the loan.
When a deferment ends on an unsubsidized Direct Loan, any unpaid interest capitalizes automatically.4Federal Student Aid. Student Loan Deferment In the earlier example, the twelve-month deferment turns a $30,000 loan into a $31,917 loan, and 6.39% then applies to that higher balance.5Federal Student Aid. Deferment and Forbearance FAQ
Forbearance is handled better under current rules. Unpaid interest that accumulated during forbearance does not capitalize when the period ends.5Federal Student Aid. Deferment and Forbearance FAQ When you resume paying, your payments cover the accrued interest first and then principal. You still owe the interest, but it doesn’t compound against you.
The most effective way to prevent capitalization is to make interest-only payments during the pause, even when nothing is required. On a $30,000 unsubsidized loan at 6.39%, that’s about $160 per month. Partial payments help too, because they reduce how much interest eventually capitalizes.6Nelnet. Interest Capitalization
Private Student Loans, Auto Loans, and Credit Cards
Private debts run on contract terms, and those contracts almost never include an interest subsidy from anyone.
When a private student loan lender grants a deferment or forbearance, interest continues to accrue at the contractual rate on the full outstanding balance. The lender is pausing your payment obligation, not the interest clock. Some private lenders capitalize accrued interest monthly during the pause rather than waiting until it ends, which makes the compounding steeper. Read your promissory note, or call your servicer, before accepting any relief.
Auto lenders sometimes offer payment extensions during short-term hardship. Interest keeps accruing because car loans use simple interest, calculated daily on the remaining balance. An extension can meaningfully increase the total interest you pay over the life of the loan and may add extra payments to the end of the term.7Consumer Financial Protection Bureau. Worried About Making Your Auto Loan Payments Some lenders also charge a flat processing fee on top.
Credit cards don’t offer a standard deferment. Some issuers do run hardship programs for job loss, medical bills, or other financial setbacks, but you’ll usually have to call and ask. When available, the program may temporarily lower your rate, cut your minimum payment, or waive late fees. Interest normally still accrues, just at a lower rate.
Mortgage Forbearance
Interest always accrues during mortgage forbearance. The lender is still funding the loan and charging for the use of that capital regardless of whether payments are coming in. On a $250,000 mortgage at 6.5%, about $1,354 in interest accumulates every month you’re paused.
You won’t be required to repay everything at once when the forbearance ends.8Consumer Financial Protection Bureau. Mortgage Forbearance Ending – Time To Take the Next Step Servicers typically offer a repayment plan that spreads the missed amount across your monthly payments, a loan modification that permanently adjusts the loan terms, or a payment deferral that sets the forborne amount aside as a non-interest-bearing balance due at sale, refinance, or payoff. Under Fannie Mae guidelines, servicers can defer up to six months of missed payments this way, capped at twelve months cumulatively.9Fannie Mae. Payment Deferral Which options you qualify for depends on the investor behind your loan.
How to Keep the Cost Down
A payment pause doesn’t have to be all-or-nothing. A few small moves during the pause can save real money.
Pay the interest if you can. Even when your servicer requires no payment, covering the monthly interest keeps your balance from growing and, for federal student loans, prevents capitalization when the deferment ends. If you can’t cover the full interest charge, pay what you can. Any amount reduces the eventual damage.
Choose deferment over forbearance on federal student loans when both are available. Subsidized loans accrue zero interest during deferment, and on unsubsidized loans you at least avoid the fact that forbearance also lets subsidized loans start bleeding.
Claim the student loan interest deduction. Interest you pay during deferment or forbearance counts, up to $2,500 on your federal return, and the deduction is available even if you don’t itemize (income limits apply).10IRS. Student Loan Interest Deduction
Look at income-driven repayment before pausing federal student loans. A qualifying calculation can drop your payment to something you can manage, or to $0, and those months still count toward PSLF or IDR forgiveness. Deferment and forbearance months generally do not.
Call before you fall behind. For mortgages, auto loans, and private student loans, the best relief terms go to borrowers who reach out before missing a payment. Once you’re delinquent, options narrow and the lender’s willingness to negotiate on how interest is handled drops.