Objective This study aimed to prospectively evaluate cognitive functioning in hepatitis C virus patients before, during, and after interferon alpha and to assess the psychiatric side effects of interferon alpha such as depression and anxiety. Methods A total of 100 chronic hepatitis C virus patients eligible for interferon therapy from the hepatitis outpatient clinic of Assiut University Hospital were included. A full medical and psychiatric assessment was done using the Hamilton Depression Rating Scale (HAM-D) and Hamilton Anxiety Rating Scale (HAM-A). Cognitive assessment was done using The Mini-Mental State Examination (MMSE), Memory Assessment Scales (MAS), and Wechsler Adult Intelligence Scale (WAIS). Medical, cognitive, and psychiatric assessments were conducted at the start of the study and after starting the treatment at two, four, and six months. Results There was a significant increase in the mean scores of HAM-D (t = 7.739, p < 0.001; t = 5.707, p < 0.001; t = 5.115, p < 0.001) and HAM-A (t = 6.237, p < 0.001; t = 4.154, p < 0.001; t = 3.955, p < 0.001) scales at the two, four, and six month follow-ups, respectively, in comparison to the baseline measurements. As regards to the MAS, repeated assessments after two, four, and six months showed no statistically significant difference from the baseline apart from deterioration in the verbal memory performance after six months in comparison to the baseline (t = −2.605, p = 0.011). As regards to MMSE, the verbal intelligence quotient (IQ), performance IQ, and total IQ, there was a significant improvement in the patients’ cognitive performance, in comparison to the baseline, after two months (t = 2.144, p = 0.035), four months (t = 2.868, p = 0.002), and six months (t = 3.505, p = 0.001), respectively. There was also a significant negative correlation between HAM-D mean scores and the MAS verbal mean scores of the patients (r = −.219, p = 0.039). Conclusion There were increases in symptoms of depression and anxiety during interferon alpha and ribavirin treatment, which do not correlate with the patients’ cognitive performance. There was a significant improvement in cognitive performance except in verbal memory with the progress of interferon alpha treatment. Years of education, socioeconomic status, and lower quantitative polymerase chain reaction are predictors for better cognitive performance.