America's Growing Debt Problem: Understanding the $38 Trillion Challenge

Summary

What is the Debt Problem?

The United States government is facing a serious money problem. As of right now in January 2026, America owes $38.4 trillion. This is roughly equal to everything the country produces in one year.

To help you understand how big this number really is, imagine if you earned $100,000 per year and owed $100,000 in debt. That is roughly where America stands right now.

Every single day, the government needs to borrow about $8 billion just to keep running. The government spends more money than it collects in taxes, so it has to borrow the difference. This borrowing has been happening year after year, and the total debt keeps growing bigger and bigger.

Why Did the Debt Get So Large?

The debt grew for several reasons. During the 2008 financial crisis, the government spent lots of money to help the economy.

During the COVID-19 pandemic in 2020-2021, the government sent money to individuals and businesses to help them survive the shutdowns.

Additionally, the government has been spending more than it collects in taxes for decades. Social Security and Medicare programs cost more each year as people retire and live longer. The government also maintains a large military. All of these costs added up to create the massive debt.

Then in 2017, President Trump signed a major tax cut bill that reduced the taxes people and companies pay. This was supposed to expire at the end of 2025, but in July 2025, Congress passed the One Big Beautiful Bill Act, which kept the tax cuts and added more spending. This decision made the debt problem worse.

How Does the One Big Beautiful Bill Act Make the Problem Worse?

The One Big Beautiful Bill Act is a huge bill that Congress passed in July 2025. Think of it like this: imagine you are already in debt, and instead of cutting your spending, you decide to spend even more. That is what this bill does to the government.

The bill does several things.

First, it keeps the 2017 tax cuts, which means the government collects less money in taxes.

Second, the bill adds $150 billion for defense spending.

Third, it adds $150 billion for border security and immigration enforcement. Fourth, the bill cuts Medicaid spending by about 12 “%, which means less money for healthcare for poor people.

The bill is expected to add between 3.4 trillion and $5.5 trillion to the debt over the next ten years. That means for every year the bill is in effect, the debt will grow by roughly $340 to $550 billion more than it would have grown anyway.

The government also included tariffs in this bill—these are taxes on imported goods—that are supposed to bring in money to help pay for the spending.

The government collected $195 billion from tariffs in 2025. However, there is a big problem: courts ruled that many of these tariffs are probably illegal.

If the Supreme Court agrees, the government could lose $2.2 trillion in expected revenue over the next ten years.

The Interest Payment Crisis

Here is where the problem becomes very serious. When you borrow money, you have to pay interest on it. For example, if you borrow $1000 at 5% interest, you owe the bank $50 per year just to pay for the interest.

The American government is now paying about $1 trillion per year just in interest on its debt.

That is one thousand billion dollars per year. To put this in perspective, one trillion dollars could:

Build 200,000 brand new schools

Provide free healthcare to 200 million people for one year

Repair every road in America three times over

This interest payment is growing very fast. Just five years ago in 2020, the government paid $345 billion in interest.

Now it pays one trillion dollars. This tripling of interest payments happened because the debt got much larger and because interest rates went up.

The Congressional Budget Office predicts that by 2035, interest payments will reach 1.8 trillion dollars per year. That means paying 1.8 times more in interest than we do today. This is a serious problem because that money cannot be used for anything else.

How the Debt Hurts the Economy

When the government borrows too much money, it affects everyone in America, not just the government. Here is how:

First, when the government borrows heavily, it competes with businesses for loans. Imagine you and your neighbor both want to borrow money from the same bank at the same time.

The bank has limited money to lend. If the government borrows a lot, the bank may not have enough left to lend to your neighbor to start a business or buy a house. When this happens, interest rates go up for everyone. This is why mortgage rates and business borrowing costs have increased in recent years.

Second, when interest rates go up, businesses invest less in new factories and equipment, and families invest less in homes and education. Less investment means fewer jobs and slower income growth for workers. For example, if a company cannot afford to borrow money at a reasonable rate to build a new factory, it will not hire the 500 new workers it might have hired. Those 500 workers and their families suffer.

Third, when businesses invest less, productivity slows down. Productivity means how much each worker produces. When productivity grows, wages rise. When productivity slows, wage growth slows too.

The Peterson Foundation studied this problem and found that by 2035, American wages would be about 5.3% lower than they would be with more responsible fiscal policies. That means instead of earning $100,000, a worker might earn $94,700—a loss of $5300 per year.

What Happened in the Past?

Many people say that America got out of its debt problem after World War II. After World War II ended in 1945, America owed 106% of its yearly income in debt—similar to where America is today.

By 1974, this debt had declined to only 23% of yearly income. Many people argue that economic growth solved this problem.

However, recent scholarly analysis shows this is not quite correct. The government did grow the economy, but that only explains part of the story. The real reason the debt declined was because the government made two other important choices.

First, it cut spending after the war. From 1946 to 1974, the government spent less than it collected in taxes. This is called running a primary surplus.

Second, the Federal Reserve intentionally kept interest rates low, which meant the government paid less in interest.

The growth part was the smallest contributor—it only explained about 22% of the improvement in the debt-to-GDP ratio.

This is important because it shows that America cannot simply "grow its way out" of today's debt problem without cutting spending or raising taxes.

What Could Happen in the Future?

The Committee for a Responsible Federal Budget made predictions about what might happen over the next ten years. Under their baseline scenario, the national debt would grow to 120% of GDP by 2035.

In other words, America would owe more than it produces in one year. Annual deficits—the amount the government spends more than it collects—would reach $2.6 trillion per year by 2035.

Under a worse-case scenario, if the courts rule that the tariffs are illegal, the debt could reach 134 % of GDP by 2035. This would be very serious and could cause a debt crisis.

However, there is one scenario where things could improve. If the American economy grew at 3% per year in real terms, deficits could be contained, and the debt problem would become much more manageable. But here is the problem: the United States economy has not grown at 3% per year since the 1990s. The crowding-out effect caused by government borrowing makes it harder for the economy to grow that fast.

What Are the Biggest Concerns?

Economists and financial experts have identified several serious concerns about the current fiscal path:

First, the government's borrowing is squeezing out private investment. As mentioned earlier, this "crowding out" means less money for new businesses, homes, and factories. This reduces economic growth and job creation.

Second, interest costs are rising very quickly. If current trends continue, interest payments will eventually consume one quarter of every tax dollar the government collects. That means there will be less money for national defense, schools, roads, science research, and everything else the government does.

Third, the government is losing fiscal flexibility. When there is a crisis—like a pandemic, a natural disaster, or a major national security threat—the government needs to borrow money quickly to respond. When debt is already very high, it is harder to borrow, and interest rates may spike even higher.

Fourth, the dollar's strength is at risk.

Foreign investors own about one-third of all American government debt. If investors lose confidence in America's ability to pay back this debt, they might stop buying American bonds or might demand much higher interest rates. This would make it even more expensive for America to borrow.

Fifth, political constraints make solutions difficult. Both political parties have resisted cutting spending or raising taxes.

The One Big Beautiful Bill Act shows that even during times of full control by one party, politicians chose to extend tax cuts and increase spending rather than address the debt problem. This suggests that voluntary deficit reduction has become politically impossible.

What Are the Possible Solutions?

The Committee for a Responsible Federal Budget calculated that the government would need to find approximately $7.5 trillion in savings over the next decade to bring the deficit down to 3% of GDP—a level economists consider sustainable. This savings could come from several sources:

First, the government could raise taxes. This could mean raising income tax rates, creating new taxes, or reducing tax deductions. The challenge is that most Americans dislike tax increases.

Second, the government could reduce spending. This could mean cutting defense spending, reducing Medicare or Social Security benefits, or eliminating less important programs. The challenge is that these programs are very popular, and many people depend on them.

Third, the government could do both—raise some taxes and cut some spending. This is the most politically difficult option because it disappoints both groups. However, most economists believe this combined approach is necessary.

Fourth, economic growth could help if it is robust enough. But as mentioned earlier, the crowding-out effect makes robust growth difficult to achieve while running large deficits.

Why Should People Care?

The debt problem affects every American in concrete ways. If interest rates stay high, home mortgages are more expensive, which means fewer people can afford to buy houses. If the government spends more on interest payments, there is less money for schools, roads, bridges, and scientific research. If businesses invest less because of high borrowing costs, workers earn lower wages. If the government eventually faces a debt crisis, the consequences could include deep recession, high unemployment, and severe cuts to government programs.

For younger people, the issue is particularly important. The large debt means that younger generations will inherit a budget crisis. They may face much higher taxes or much lower government services as older debts need to be paid off.

Conclusion

America faces a serious fiscal challenge. The national debt has reached $38.4 trillion, and the government's annual spending exceeds its income by large amounts.

The One Big Beautiful Bill Act makes the problem worse by extending tax cuts and increasing spending without raising revenues. Interest payments on the debt are consuming an unprecedented share of federal revenues and will continue growing.

The solutions are difficult but necessary: the government will eventually need to raise revenues, reduce spending, or both. Without action, America's debt will continue growing unsustainably, squeezing out private investment, limiting government flexibility during crises, and reducing economic opportunity for future generations.

The history of post-World War II debt reduction shows that growth alone cannot solve this problem. The government will need to make deliberate policy choices about spending and revenues. These choices are difficult, but they are essential for America's long-term economic health and the economic opportunity of future generations.