The accrued unpaid interest is added to the balance of your loan. It's called "capitalized interest." When you start to make payments again your payments will include some of the capitalized interest. If your loan was taken out on or after September 1, 2004, the capitalized interest will be include in the interest shown on Form 1098-T, and all you will have to do is report it the same as you normally would. But if your loan was taken out before September 1, 2004, your 1098-T might have box 2 checked. That would indicate that the interest amount shown on the form does not include the capitalized interest. In that case, the amount of interest that you will be able claim will be more than what's shown on the 1098-T. The discussion of capitalized interest in IRS Publication 970 explains how to calculate the full amount of interest that you should claim.
