When you pause federal student loan payments, interest almost always keeps building. During deferment, the government pays the interest on Direct Subsidized Loans and nothing else; during forbearance, interest accrues on every loan type regardless of subsidy status. That unpaid interest sits on your account until a triggering event capitalizes it, meaning it gets added to your principal balance and starts generating interest of its own. This is how interest accrues and capitalizes during deferment and forbearance, and it is the mechanism that quietly turns a temporary pause into thousands of dollars of extra repayment cost.
How Daily Accrual Works
Federal student loan interest is calculated daily using a simple interest formula. Your servicer takes the annual rate, divides by 365.25, and multiplies that daily factor by your current principal.1Edfinancial Services. Payments, Interest, and Fees The daily charge accumulates whether or not you are making payments. On a $30,000 loan at 6.39%, that works out to roughly $5.25 a day, or about $158 a month.
The rate on each of your loans was fixed at disbursement and does not change. A loan disbursed in 2022 at 4.99% keeps that 4.99% forever. Whatever rate is stamped on each of your loans is the rate driving accrual during any pause.
What Happens During Deferment
Deferment lets you pause payments when you meet specific criteria, such as at least half-time enrollment, a qualifying graduate fellowship, or documented economic hardship.2Federal Student Aid. Grace Periods, Deferment, and Forbearance in Detail What deferment does to your interest depends entirely on which loans you hold.
Direct Subsidized Loans
Direct Subsidized Loans are the only federal student loans where the government covers interest during an eligible deferment. No interest accrues, and your balance stays exactly where it was when the deferment began.3Federal Student Aid. Direct Loan School Guide – Chapter 5 This is the defining benefit of subsidized loans. An older rule stripped this benefit from first-time borrowers who exceeded 150% of their program length, but that provision was repealed effective July 1, 2021.4Federal Student Aid. 150 Percent Direct Subsidized Loan Limit Frequently Asked Questions
Unsubsidized and PLUS Loans
Direct Unsubsidized Loans and Direct PLUS Loans get no interest benefit during deferment. Interest accrues at the full rate on your Master Promissory Note.2Federal Student Aid. Grace Periods, Deferment, and Forbearance in Detail A borrower with $40,000 in unsubsidized debt at 6.39% would see about $2,556 pile up over a single year of deferment. On a PLUS loan at 8.94%, the same balance would generate roughly $3,576.
You can make interest-only payments during deferment to keep the balance from growing. They are not required, but skipping them means the accrued interest will capitalize once the deferment ends.
What Happens During Forbearance
Forbearance is where interest does the most damage. Unlike deferment, it provides no government interest subsidy on any loan type. Interest accrues on subsidized loans, unsubsidized loans, and PLUS loans alike at their full rates.5Federal Student Aid. Deferment and Forbearance If you assume a subsidized loan is protected during forbearance the way it is during deferment, you are in for an unpleasant surprise.
There are two categories. General (discretionary) forbearance is granted at your servicer’s judgment when you demonstrate financial hardship, illness, or another acceptable reason. Mandatory forbearance is required by regulation in specific situations, including when your total monthly student loan payments equal or exceed 20% of your gross monthly income.6Federal Student Aid. Student Loan Debt Burden Mandatory Forbearance Request Other mandatory triggers include serving in a medical or dental residency and qualifying for teacher loan forgiveness.7eCFR. 34 CFR 685.205 – Forbearance
Each forbearance period can last up to 12 months and can be renewed, though cumulative forbearance is generally capped at three years.8Federal Student Aid. FSA Handbook – Volume 5 – Perkins Loans A $50,000 loan at 6.39% generates about $266 a month in forbearance interest. Over a full three-year forbearance, that is roughly $9,585 sitting on the account, waiting to capitalize.
How Capitalization Turns Accrued Interest Into Principal
Capitalization is the moment your servicer folds unpaid accrued interest into your principal balance.9Federal Student Aid. What Is Interest Capitalization on a Student Loan Once it happens, that new, larger principal is the basis for all future daily interest calculations. You start paying interest on what used to be just interest.
A concrete example. A borrower with $25,000 in unsubsidized loans at 6.39% enters a 12-month deferment and makes no interest payments. About $1,598 accrues over the year. When deferment ends, it capitalizes, and principal resets to $26,598. Daily interest jumps from $4.38 to $4.65. The daily difference looks small, but the borrower pays interest on that extra $1,598 for every remaining day of a 10-year repayment term.
Capitalization after forbearance hits harder because interest accrued on every loan, not just unsubsidized. Eighteen months in forbearance on $60,000 of mixed subsidized and unsubsidized debt can add $4,000 to $6,000 to principal, depending on the rate mix.
Events That Trigger Capitalization
Federal regulations specify when unpaid interest capitalizes. The main triggers are:
- The end of a deferment period on an unsubsidized or PLUS loan10eCFR. 34 CFR 685.202 – Charges for Which Direct Loan Program Borrowers Are Responsible
- The end of a forbearance period on any loan type7eCFR. 34 CFR 685.205 – Forbearance
- Leaving an income-driven repayment plan such as IBR, or failing to recertify your income on time
- Consolidating federal loans into a Direct Consolidation Loan
Before granting a deferment, your servicer has to tell you how capitalization will affect your balance, including an example showing the impact on both principal and total interest over the life of the loan.11eCFR. 34 CFR Part 685 Subpart B – Borrower Provisions If you want to prevent capitalization, pay off the accrued interest before the pause period ends. Once the period ends without payment, capitalization is automatic.
Consolidation as a Separate Capitalization Event
Consolidation is worth calling out because borrowers coming off deferment or forbearance often reach for it next. Any outstanding accrued interest on the loans you consolidate capitalizes immediately when the new consolidation loan is created.12Federal Student Aid. 5 Things to Know Before Consolidating Federal Student Loans If you consolidate right at the end of a long pause, you lock the maximum accrued interest into the new principal.
The consolidation rate is the weighted average of the underlying rates, rounded up to the nearest one-eighth of one percent, capped at 8.25%.13Federal Student Aid. Loan Consolidation in Detail The rounding always works against you. Consolidation is often necessary to access certain repayment or forgiveness programs, but paying down accrued interest before you consolidate starts the new loan with a cleaner balance.
What SAVE Enrollees Should Know Right Now
The SAVE plan, finalized in July 2023, was designed to prevent unpaid interest from accumulating when a borrower’s income-driven payment did not cover full monthly interest.14Federal Register. Improving Income-Driven Repayment for the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program Under SAVE, the government would waive the shortfall rather than let it build.
SAVE is currently blocked. A federal court order issued March 10, 2026 prevents the Department of Education from implementing the SAVE plan and portions of other IDR plans. Enrolled borrowers were placed in forbearance during the litigation and must now select a different repayment plan; if you do not choose one, your servicer will move you.15Federal Student Aid. IDR Court Actions The interest that accrued during that forbearance follows the ordinary forbearance rules. It will capitalize when the forbearance ends and you enter a new plan. If you are in this group, ask your servicer for your current accrued interest balance and, if you can, pay it down before the transition capitalizes it.
The Tax Side of Capitalized Interest
Capitalized interest is treated as deductible student loan interest for federal tax purposes, but only in years when you actually make loan payments. In a year with no payments, you cannot deduct interest that accrued during the pause. The deduction becomes available later, as your regular payments work through the principal that now includes the capitalized amount.16Internal Revenue Service. Publication 970, Tax Benefits for Education
The student loan interest deduction is capped at $2,500 a year and phases out at higher incomes. For the 2025 tax year, the phaseout begins at $85,000 of modified adjusted gross income for single filers and $170,000 for married couples filing jointly, and it disappears entirely at $100,000 and $200,000, respectively.16Internal Revenue Service. Publication 970, Tax Benefits for Education You do not need to itemize; it reduces your adjusted gross income directly. Capitalized interest is folded into the amount your servicer reports on Form 1098-E, so once payments resume, the reporting handles itself.17Internal Revenue Service. Instructions for Forms 1098-E and 1098-T