A 12-Month Deferment Can Permanently Add $714 to Your Student Loan Cost
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When unpaid interest capitalizes into principal at the end of a deferment or forbearance, you start paying interest on that interest for the rest of the loan — a cost that paying it as it accrues avoids entirely.
The cost isn’t the interest — it’s the interest on the interest
We ran a $30,000 balance at 6.53% through a 12-month deferment, then 10 years of standard repayment, through the calculator: $1,959 accrues during the deferment either way — that part is unavoidable. But if it capitalizes into principal at the end of the deferment, total repayment reaches $43,605.12; if the same $1,959 is instead paid as it accrues (so nothing capitalizes), total repayment is $42,891.24 (plus the $1,959 already paid) — a $713.88 permanent difference, purely from the order of operations.
How the math works
accruedInterest = principal × (rate ÷ 12) × defermentMonths. Compare standard amortization on (principal + accruedInterest) over the remaining term against accruedInterest paid upfront plus standard amortization on the original principal alone — the gap between the two is the permanent cost of capitalization.
What this tool doesn’t model: partial interest payments during deferment (this compares the two clean extremes), subsidized loans (which don’t accrue interest during in-school deferment at all, so nothing capitalizes), or the SAVE plan’s litigation-affected subsidy rules — see the IDR calculator’s own note on why SAVE is deliberately excluded there too.
Math runs locally. Inputs never leave your browser. Source on github.
Where this doesn’t apply
- Your loans are subsidized and still in the in-school or grace period. Subsidized loans don’t accrue interest during those periods at all — there’s nothing to capitalize.
- You’re already paying interest as it accrues during deferment. If nothing is left unpaid at the capitalization trigger point, there’s no extra cost to calculate.
- You’re enrolled in an IDR plan. IDR plans have their own, more limited capitalization triggers — see the IDR Repayment calculator, which models negative amortization directly rather than a single capitalization event.
- You expect loan forgiveness (PSLF or Teacher Loan Forgiveness) before this balance would ever be fully repaid. A capitalization event still raises the balance being forgiven, but doesn’t cost the borrower more out of pocket the same way it does under standard repayment.
What to actually do
- If you know a deferment or forbearance is coming, ask your servicer for the exact accrued-interest amount before the capitalization date.
- Pay even small amounts toward that accrued interest during the deferment — every dollar paid is a dollar that never compounds against you later.
- Confirm whether your specific loans are subsidized or unsubsidized — the rules genuinely differ.
- If pursuing PSLF or Teacher Loan Forgiveness, weigh whether avoiding capitalization is worth the cash flow now, since forgiveness may erase the balance anyway.
- Before entering any deferment, compare the total cost here against simply staying in a low, affordable payment plan instead.