U.S. debt reaches $38.5 trillion: how interest payments become the main budget burden

The U.S. federal debt continues to soar to new all-time highs. By early 2025, Washington faced a debt of $38.5 trillion, a figure projected to surpass $40 trillion before the Northern Hemisphere summer. But more alarming than the size of the debt is the explosion in the costs associated with servicing it: in just six years, annual interest payments have multiplied from $345 billion (2020) to over $1 trillion. This radical change redefines the federal government’s budget priorities.

Debt Growth Accelerates at an Unprecedented Pace

From 2006 to today, U.S. borrowing experienced a dizzying rise that intensified after 2020. Two decades ago, the debt did not exceed $10 trillion; by 2017, it crossed the $20 trillion mark; and after the pandemic, it jumped above $30 trillion in 2021.

Between 2020 and 2025, the fiscal deficit grew by an additional $15.3 trillion. In daily terms, Washington added approximately $6.3 billion each day to the debt level in 2024, accelerating to nearly $6 billion daily during 2025. This sustained pace means each American household carries $285,733 in federal debt per capita.

Historically, it took more than 200 years for the nation in debt to surpass the first trillion dollars in 1981. Three decades later, reaching $40 trillion will happen in just a matter of months. The debt curve becomes almost vertical as it approaches 2025-2026.

Interest Costs Exceed $1 Trillion: The New Fiscal Scenario

Debt service—the interest payments required to keep the bond stock alive—has become the fastest-growing budget item. In 2020, these payments totaled $345 billion annually. Six years later, the figure exceeded $1 trillion, a nearly 200% jump.

The Federal Reserve Bank of St. Louis documented that the M2 money supply continued expanding to reach $22.4 trillion, reflecting ongoing monetary stimulus. However, as interest rates began to rise, the existing debt—mainly long-term Treasury bonds—was valued at increasing rates, multiplying refinancing costs.

According to the Committee for a Responsible Federal Budget, the situation sets a new standard: debt service now consumes an ever-increasing share of federal tax revenues, even surpassing defense spending. This structural change limits the government’s discretionary capacity to invest in infrastructure, research, or social programs without worsening the deficit.

Policy Measures: Insufficient Against the Debt?

In its second term, the Trump administration signed the “One Big Beautiful Bill” in 2025, a legislation with a projected fiscal cost of $3.4 trillion over a decade, mainly through tax cuts and new spending. Simultaneously, the Department of Government Efficiency (DOGE) was promoted to reduce expenses.

DOGE reported savings of $202 billion since its creation, equivalent to $1,254.66 per taxpayer. Tariffs also generated additional revenue: rising from $7 billion in 2025 to $25 billion by mid-2026. However, these numbers need context: DOGE savings represent just 0.52% of the current federal debt, while tariff revenues account for only 0.07% of total debt.

Though symbolically significant, these initiatives remain small-scale compared to the magnitude of structural fiscal sustainability challenges.

Japan and the UK: The New Major Holders of U.S. Bonds

The composition of foreign holders of U.S. debt has undergone significant changes. Japan consolidates its position as Washington’s largest foreign creditor with over $1.1 trillion in Treasury bonds according to the latest U.S. Treasury data.

The UK displaced China from second place, holding more than $800 billion in Treasury bonds. This shift reflects custody flows linked to London’s role as a global financial center, rather than a net accumulation of U.S. debt by British managers.

China, once the second-largest foreign creditor, has reduced its net Treasury holdings year after year. This geopolitical repositioning suggests changes in Asian powers’ risk hedging strategies amid U.S. fiscal volatility.

The dilemma remains: with interest costs exceeding $1 trillion annually and growing, Washington’s capacity to sustain deficits without pressuring bond markets is progressively diminishing. The $38.5 trillion debt is not just a number: it reflects accumulated budget decisions that are beginning to produce structural consequences in the global economy.