Does Interest Accrue During Deferment?

Loan deferment offers a temporary pause in loan payments, providing borrowers with financial relief during periods of hardship. A common question is whether interest continues to accumulate on the loan balance. The answer is not always straightforward, as it depends on the loan type and specific deferment program terms.

Understanding Interest Accrual in Deferment

Interest is essentially the cost of borrowing money, calculated as a percentage of the outstanding loan principal. During a deferment period, while payments are suspended, interest often continues to accumulate on the loan balance. This ongoing accumulation means that even without making payments, the total amount owed can increase over time.

A key concept is “capitalization of interest.” This occurs when unpaid, accrued interest is added to the loan’s principal balance. Once interest capitalizes, the loan’s principal amount increases, and future interest calculations are based on this new, larger principal. This process can lead to a higher total loan amount and potentially increased monthly payments once repayment resumes.

Interest Accrual for Student Loans

The rules for interest accrual during student loan deferment vary by loan type. For federal subsidized student loans, the government typically pays the interest that accrues during an approved deferment period, meaning the borrower is not responsible for this interest. This prevents the loan balance from growing.

For unsubsidized federal student loans, interest continues to accrue during deferment. If this accrued interest is not paid by the borrower, it will capitalize (be added to the principal balance) when the deferment ends. This capitalization increases the overall loan amount, leading to a higher total cost. Private student loans generally follow a similar pattern, with interest continuing to accrue during deferment and often capitalizing if unpaid; specific terms vary by lender. Borrowers may have the option to make interest-only payments during deferment to avoid capitalization.

Interest Accrual for Other Loan Types

For loan types beyond student loans, interest typically continues to accrue during deferment periods. For mortgages, if a borrower enters forbearance, interest usually continues to accumulate on the outstanding principal balance. While payments are paused, the loan balance grows, which may necessitate a larger outstanding balance or a modified repayment plan when the forbearance period concludes.

Similarly, for personal loans and auto loans, interest almost universally continues to accrue during any approved deferment or payment extension. This means that even without making payments, the amount owed still increases daily. Lenders may allow deferment for a few months, but the accumulated interest will be added to the loan, increasing the total cost over its lifetime.

Impact on Loan Balances

When interest accrues and capitalizes during a deferment period, it impacts the financial outcome of a loan. The most immediate consequence is an increase in the total outstanding loan balance when repayment resumes. This larger principal amount then generates more interest over the remaining life of the loan.

The growth of the principal balance can lead to higher monthly payments once the deferment ends, as the borrower must repay a larger sum over the remaining term. Alternatively, if monthly payments remain the same, the repayment period will be extended. In either scenario, the total interest paid over the loan’s life increases, making the loan more costly than if payments had continued.