Does Interest Accrue During Forbearance on Federal Student Loans?

For federal student loans, interest can accrue during forbearance, but there's a catch - it depends on the type of loan and the terms of the forbearance.

Federal loans in forbearance typically charge interest, but some types of loans, like Direct Subsidized Loans, don't accrue interest during deferment or forbearance.

This can be a big difference for borrowers, as it means they won't have to pay interest on their loans for a certain period.

In fact, Direct Subsidized Loans and some other federal loans have a six-month grace period after graduation before interest starts accruing, which can be a welcome relief for students.

If this caught your attention, see: Forbearance on Mortgage Loans

Forbearance is a temporary postponement of loan payments, giving borrowers a break from making payments and accruing interest on their loans until further notice.

Borrowers can still make payments to their loan servicer during forbearance, which will be applied to future bills after forbearance ends.

However, any payments made during the forbearance period won't count toward loan forgiveness, including Public Service Loan Forgiveness, which can be frustrating for borrowers close to having their debt forgiven.

There are two types of forbearance for federal student loans: general forbearance and mandatory forbearance.

General forbearance, also known as discretionary forbearance, allows your student loan servicer to decide whether or not to grant you forbearance. All federal loans are eligible for general forbearance.

You can request general student loan forbearance if you're temporarily unable to make your payments due to certain financial difficulties. General forbearance can only be granted for up to 12 months at a time.

Perkins Loans have a different rule, allowing you to get general forbearance for up to three years. With other types of loans, there is no maximum limit of time you can get forbearance.

Mandatory forbearance, on the other hand, requires your loan servicer to provide you with forbearance if you meet one of the mandatory forbearance requirements.

Check this out: How Often Does Interest Accrue on a Student Loan

Forbearance is a temporary postponement of loan payments.

Borrowers who are in forbearance will not have to make payments and will not accrue interest on their loans until further notice.

Even if borrowers receive a bill, they will not have to pay it.

Borrowers can still make payments to their loan servicer during forbearance, and those payments will be applied to future bills after forbearance ends.

However, any payments made during the forbearance period will not count toward loan forgiveness, including Public Service Loan Forgiveness.

During forbearance, your principal balance payments will decrease or stop, but interest will continue to accumulate, potentially increasing the total amount you owe.

This can be a significant concern, as interest can add up quickly, depending on how long your loans are in forbearance.

Paying only the interest as it accrues is a cost-effective option that can prevent your total loan balance from ballooning when the deferment or forbearance period is over.

However, as noted by Fred Amrein, founder of College Affordability LLC, this option may not be feasible for families or students who borrowed money because they didn't have extra funds to pay for school.

Making interest-only payments can be a challenging task, especially if you're already struggling to make ends meet.

Broaden your view: Payment Option

If you're one of the 8 million borrowers in the SAVE plan, here's the deal: you won't have to make payments, and you won't accrue interest on your loans until further notice.

The Department of Education put these borrowers into forbearance after a federal court blocked the SAVE plan, pending a final ruling.

Forbearance means you get a temporary break from making payments, but it's not the same as forgiveness.

Here are the key takeaways:

If you're in forbearance, you might be wondering whether interest accrues during this time. Yes, interest continues to accumulate, even if you're not making payments on your principal balance.

The amount of interest that accrues depends on your loan's terms, but in most cases, it will be added to your principal balance, also known as capitalization. This means your total loan balance will increase, and you'll end up paying interest on the interest that built up while you were in forbearance.

Fred Amrein, founder of College Affordability LLC, notes that this is often a cash flow issue for students and families, who may not have the funds to pay the interest even if they wanted to. If you're in this situation, you might have to consider other options.

To give you a better idea of how interest accrues during forbearance, let's look at an example. Say you owe $35,000 in student loans at a 5.70% interest rate and you're on the 10-year Standard Repayment Plan. In this case, a total of $1,995 in interest would accrue over a year of forbearance, adding to your original loan balance.

By paying the interest that accrues during forbearance, you can prevent it from capitalizing and keep your total loan balance from increasing. This might be a good option if you can afford to make interest-only payments.