How the US National Debt Works and Why It Matters

What Is the National Debt?

Every year the United States government spends more money than it collects in taxes, it runs a budget deficit. To cover the shortfall, the Treasury borrows money by selling securities — bills, notes, bonds, and inflation-protected instruments — to investors around the world. The national debt is simply the running total of all that accumulated borrowing, plus the interest owed on it.

The gross national debt now exceeds $39 trillion, growing at a pace of roughly $7.2 billion per day, according to the Joint Economic Committee. To put that in perspective, the debt has nearly doubled since 2017, when it stood around $20 trillion.

How the Government Borrows

The U.S. Treasury raises money by auctioning securities backed by the "full faith and credit" of the federal government. These instruments come in several flavors:

• Treasury bills — short-term debt maturing in weeks to one year
• Treasury notes — medium-term, maturing in two to ten years
• Treasury bonds — long-term, maturing in 20 or 30 years
• TIPS — inflation-protected securities that adjust with the Consumer Price Index

Because U.S. Treasuries are considered among the safest investments on Earth, demand remains strong — which is what allows the government to keep borrowing at relatively favorable rates.

Who Holds All That Debt?

Contrary to popular belief, foreign governments are not the biggest creditors. According to the Peter G. Peterson Foundation, domestic holders own more than two-thirds of the debt. The breakdown of publicly held debt looks roughly like this:

• ~54% — domestic private investors, pension funds, mutual funds, banks, and state governments
• ~31% — foreign entities, led by Japan (~$1.1 trillion) and the United Kingdom (~$809 billion)
• ~15% — the Federal Reserve, which buys and sells Treasuries to manage interest rates and money supply

China, once the second-largest foreign holder, has steadily reduced its position in recent years.

The Debt Ceiling: A Uniquely American Constraint

Congress imposes a legal cap — the debt ceiling — on how much the Treasury can borrow. Critically, it does not authorize new spending; it merely permits the government to pay for obligations Congress has already approved. When the ceiling is hit, the Treasury resorts to "extraordinary measures" to keep paying bills temporarily. A failure to raise it would mean the U.S. defaults on its obligations — an event that has never occurred but has come alarmingly close several times.

In mid-2025, Congress raised the ceiling by $5 trillion to $41.1 trillion as part of a broader fiscal package, according to the Committee for a Responsible Federal Budget.

Why the Interest Bill Is the Real Danger

The raw debt figure grabs headlines, but economists focus on a more telling metric: the cost of servicing it. Net interest payments are projected to reach $1 trillion in fiscal year 2026 — nearly triple the $345 billion paid in 2020. Interest now consumes about 13 percent of all federal spending, up from 7 percent in 2017.

The Committee for a Responsible Federal Budget warns that by 2031, the average interest rate on the debt will exceed the nation's economic growth rate. When that happens, the debt effectively begins to feed on itself: higher debt pushes interest rates up, slower growth reduces tax revenue, wider deficits add more debt, and the cycle accelerates.

What Are the Consequences?

A review of 40 academic studies cited by the American Action Forum found that 36 showed a statistically significant negative relationship between high government debt and economic growth. The main risks include:

• Slower income growth as government borrowing crowds out private investment
• Upward pressure on interest rates, making mortgages, car loans, and business credit more expensive
• Reduced fiscal space to respond to emergencies like recessions, pandemics, or wars
• An intergenerational burden, as future taxpayers inherit obligations they did not choose

Can It Be Fixed?

Economists across the political spectrum agree on the math: stabilizing the debt requires some combination of higher revenue, lower spending, or faster economic growth. In practice, the largest drivers of future deficits are mandatory programs — Social Security, Medicare, and interest payments themselves — which together consume the vast majority of the federal budget. Without structural reform to these programs or significant revenue increases, the trajectory remains upward.

The national debt is not a crisis that strikes overnight. It is a slow-moving structural challenge — one that narrows the government's options a little more with every trillion-dollar milestone.