Key takeaways
At 99 percent of GDP in the first quarter of 2026, federal debt held by the public is at its highest share since World War II, with the exception of the COVID-19 pandemic recession quarter.
Rising federal debt is estimated to have cost $4,500 per year today for a household that has a mortgage, auto loan, and student loan—the estimated costs of two and a half decades of federal debt accumulation.
Younger Americans will disproportionately bear the cost going forward since they are taking out new loans while older generations sit on locked-in, lower-rate mortgages and paid-off debts.
The national debt can feel far-removed from the everyday life routines of going to work, saving up to buy a home, or caring for a family. But rising federal debt quietly raises the cost of the mortgage on that home, pushes up the interest on the credit card that covers a bad month, and lowers the chances that the business where someone works can afford to grow and hire.
What is federal debt?
The federal debt is the cumulative difference between the total amount of revenue collected and total spending since the country’s founding. When the federal government collects less through tax revenue than it spends, it runs a deficit, and that yearly deficit adds to the overall debt. The federal debt reached a new milestone on August 18, 2026, when it surpassed $40 trillion for the first time in U.S. history. Even more than the dollar amount itself, the pace of debt accumulation is especially worrying. Currently, federal debt held by the public stands at about 99 percent of gross domestic product (GDP) as of the first quarter of 2026. This is the highest level since World War II with the exception of the second quarter of 2020—the COVID-19 pandemic recession quarter—when the economy briefly shrank.
This milestone reflects decades of accumulated deficits. For fiscal year 2025, which ended September 30, 2025, total revenues were $5.2 trillion (up 6 percent from the previous year) and total spending was $7.0 trillion (up 4 percent from the previous year). The resulting deficit was $1.8 trillion, or 5.9 percent of GDP, compared with the average deficit from 1975 to 2025 of 3.8 percent of GDP. U.S. Treasury Secretary Scott Bessent cited Iran war costs, tariff refunds, and tax cuts as recent contributors to the federal deficit. While running large deficits is crucial for recovery during economic downturns, running large structural deficits during periods of low unemployment comes at a cost to Americans.
When the debt becomes very large, an increasingly large percentage of the budget must be allocated to interest payments. That is money that could be used to fund socially impactful programs if the debt were smaller.
How does debt affect the economy?
The economic impacts of the federal debt ultimately affect American businesses and households. When the debt becomes very large, the U.S. Treasury issues bonds to cover that extra spending, raising money from investors with the promise to repay the face value plus interest. As the Treasury increases the supply of these bonds, it generally has to offer higher interest rates to attract buyers, especially as investors accumulate larger holdings of federal bonds. And because Treasury yields serve as a benchmark for other borrowing costs, this pressure ripples out to mortgages, auto loans, and business financing across the economy.
How has the federal debt affected American households?
A Congressional Budget Office (CBO) working paper estimates that for each percentage point increase in debt as a share of GDP, long-run borrowing rates rise by 2 basis points, or 0.02 percentage points. According to CBO, federal debt held by the public rose from 31.5 percent of GDP to 99.4 percent of GDP between fiscal years 2001 and 2025, a 67.9 percentage-point increase. Using the CBO’s rule of thumb, that translates to current-day interest rates being roughly 1.36 percentage points higher today than they otherwise would be due to the debt accumulated over the past 25 years. This has real effects on American households, showing up in costs for mortgages, cars loans, and student loans.
Comparing actual costs of loans today to what they would have been with a 1.36 percentage-point lower interest rate (see Table 1) shows the following effects of the increase in the national debt:
- Mortgages: The average new mortgage loan amount is $371,000. At the average rate on September 3, 2026, of 71 percent, a 1.36 percentage-point reduction would save a borrower about $325 a month and $116,900 over the life of a 30-year mortgage ($88,000 in 2026 dollars, assuming 2 percent annual inflation).
- Auto loans: The average new vehicle loan is $43,925 while the average used vehicle loan is $27,070. A 1.36 percentage-point decrease in the average auto loan rates, from 6.39 percent to 5.03 percent for new cars and from 11.43 percent to 10.07 percent for used cars, would save buyers $1,660 over a five-year loan on a new vehicle and $1,098 on a used one.
- Federal student loans: Among students who completed their degree programs in 2020 and took out federal loans, the median cumulative amount borrowed, expressed in 2026 dollars, was $31,563 for undergraduate students who attended four-year institutions and $58,125 for graduate students. These figures were calculated using the most recent data from the National Center for Education Statistics’ National Postsecondary Student Aid Study. For undergraduate borrowers, a 1.36 percentage-point decrease in interest rates, from 52 percent to 5.16 percent, would save about $21 per month, or $2,576 over a standard 10-year repayment term. For graduate borrowers, a decrease from 8.07 percent to 6.71 percent would save about $41 per month, or $4,937 over the repayment term.
These costs affect a large share of Americans: About 1 in 6 adults has student loan debt, 1 in 3 adults has an auto loan, and more than half of homeowners have a mortgage. For a household carrying all three types of debt—a mortgage, a new auto loan, and an undergraduate student loan—a 1.36 percentage-point decrease in rates would save about $4,500 per year. This illustrates the cost to an ordinary household of two and a half decades of federal debt-to-GDP accumulation.
It is worth noting that loan rates’ link to the 10-year Treasury yield varies across loan types. Federal student loan rates are directly tied to it because their formula is set by law, using the 10-year Treasury yield plus an add-on that depends on the type of loan. Mortgage rates are not set by a formula, but they generally move with Treasury yields because mortgages and Treasury bonds compete for many of the same investors. Auto loan rates are set by lenders, based on the borrower’s credit risk and the cost of funds, but they are also affected by broader changes in interest rates. For auto loans in particular, the 1.36 percentage-point change would not be fully passed on to borrowers. For the purpose of this analysis, it is used as a benchmark to show the approximate size of the burden, not as a precise estimate for this loan type.
These higher costs do not just show up as line items; they translate into real financial strain for households already stretched thin. When mortgage, auto, and student loan payments run higher than they otherwise would, some households fall behind on their payments altogether.
The financial strain shows up in delinquency data. According to the New York Fed Consumer Credit Panel, the percent of balances 90 or more days delinquent—meaning not paid in 90 days or more—has risen across loan types in recent years, with the student loan delinquent balance rate spiking sharply after pandemic-era payment pauses ended. (see Figure 3) The consequences of this for borrowers are real; missed payments can reduce credit scores and increase the cost of future loans and other forms of credit.
Federal debt raises small business borrowing costs
It’s not just households absorbing these higher costs; small businesses face the same elevated rates when they borrow to start or grow. The average loan amount for the 7(a) Small Business Administration loan was $443,097 in FY 2024, with borrowers paying an interest rate of 9.75 percent to 14.75 percent. If loan rates were 1.36 percentage points lower, from 9.75 percent to 8.39 percent, monthly payments would be $327 less, or roughly $39,190 less over a standard 10-year term.
Higher debt means slower wage growth
Higher interest rates do not just raise borrowing costs; they also affect workers’ wages. When capital becomes more expensive due to the high interest rate, businesses invest less in the equipment and technology that make workers more productive. In turn, this slows the productivity growth that drives wage growth over time. A recent Center for American Progress analysis found that over the next 30 years, a growing debt-to-GDP ratio is expected to leave average annual wages $4,200 lower (in 2025 dollars) than they would be if the debt ratio were stabilized, which is a 3.4 percent pay cut relative to where wages would otherwise land by 2055.
Looking ahead: Who pays for this?
Younger Americans are likely to bear a disproportionate share of these borrowing costs, CAP’s analysis of Federal Reserve data shows. As interest rates rise with the federal debt, younger people, who are disproportionately buying their first home or car, must borrow at the higher prevailing rates. At the same time, many older homeowners have mortgages secured before interest rates increased sharply in 2022. Since moving would often mean giving up those lower rates and facing higher rates, research shows they have less incentive to sell, limiting the supply of homes available to younger buyers. As a result, younger generations face both higher borrowing costs and a tighter housing market. Recent data from the New York Fed Consumer Credit Panel showed that American households held a total of $18.75 trillion in debt in the second quarter of 2026. Approximately 53 percent of this debt was held by individuals between the ages of 18 and 49. (see Figure 4)
While all age groups carry a variety of types of debt, the differences between age groups stand out when looking at two important types of debt in the second quarter of 2026: newly originated mortgages and newly originated auto loans. Looking at this borrowing, loans taken out by people between the ages of 18 and 49 alone made up 67 percent of the value of new mortgage originations and 61 percent of new auto loans. (see Figure 5) As interest rates increase with rising federal debt, younger generations are disproportionately taking out new debt and will thus hold the loans with higher interest rates. Older generations who have secured lower-interest-rate mortgages will largely not be exposed to rising rates on their debt balances.
Debt is about trade-offs
Not all deficits are created equal. Taking on federal debt during recessions can increase aggregate demand, and government spending during downturns tends to have a multiplier effect; each dollar spent generates more than $1 of economic activity. Investments in programs that reduce poverty or improve health can also pay for themselves over time by increasing participants’ future earnings and reducing long-term health care costs. For these reasons, running larger deficits during recessions can provide immediate support to families while helping the economy recover faster and avoid lasting economic damage.
But the federal government should not run large structural deficits, which are deficits that persist even in good economic times. Structural deficits come with real costs that ultimately land on American households, as the previous sections show. If a policy is worth funding permanently, Congress should raise the revenue to pay for it permanently rather than finance it indefinitely through borrowing. As CAP’s Bobby Kogan argues, the debt level itself matters less than its trajectory: Stabilizing the debt-to-GDP ratio, even if nominal debt keeps rising, would stop the burden from growing further. That said, all else being equal, a lower stable debt-to-GDP ratio is better than a higher one, since even the existing debt ratio contributes to the economic impacts this report has focused on.
How the government stabilizes the debt also matters. Cutting programs such as food assistance or health coverage to hit a debt target does not solve the underlying problem; it just shifts the cost onto the people who lose that aid.
Conclusion
The consequences of rising federal debt are real. They show up in higher mortgage and student loan payments, slower wage growth, and a larger cost for younger generations entering the housing market at today’s higher interest rates. If debt continues to grow faster than the economy, these costs will continue to weigh on American households. Congress can change this trajectory, but the way it does so matters. Stabilizing the debt-to-GDP ratio would prevent the debt burden from growing further. Congress has several ways to accomplish this, including changes to taxes and spending, each of which would distribute the costs differently across American households.
Acknowledgments
The author would like to thank Bobby Kogan, Rachel Cotter Johnson, and Emily Gee for their thoughtful review, Corey Husak and Aurelia Glass for their support and fact-checking of this analysis, Bill Rapp and Chester Hawkins for assistance with figure production, and Cindy Murphy-Tofig and Nicole Piper for editorial support. This report was made possible in part by a grant from the Peter G. Peterson Foundation. The statements made and views expressed are solely the responsibility of the author.