US Interest Costs Hit Record $1 Trillion, Risking Debt Snowball

The US government’s debt interest burden reached a record high for fiscal 2026, eating up a growing share of federal revenue and risking a snowballing of borrowing that could leave the country more vulnerable to economic shocks.

For the year through September, net interest costs came to $1.05 trillion, up more than 8% from the $970 billion in fiscal 2025, Treasury Department data showed Friday. The Peter G. Peterson Foundation, a research group, sees the costs reaching 3.2% of gross domestic product, surpassing the previous record, reached in 1991. GDP figures for last quarter are due later this month.

The increase reflects both that there’s a lot more debt to pay interest on — one key measure exceeds $32 trillion, some $10 trillion more than just five years ago — but also much higher interest rates. The average rate the government paid on marketable Treasuries was 3.52% at the end of September, more than double the 1.47% five years before.

What’s worse is that current yields are even higher, with the current gauge from Bloomberg’s US Treasuries index now around 5%. The rise in rates has prompted Treasury Secretary Scott Bessent into extraordinary steps to contain the move, though economists argue the nation remains distant from crisis. Demand at debt auctions has proved solid, and higher borrowing costs aren’t hindering credit flows.

“It doesn’t seem like a crisis — it’s kind of a slow eating away” of fiscal capacity, said Louise Sheiner, a senior fellow at the Brookings Institution and former economist at the Federal Reserve. What’s unknown is the point at which “some lenders are going to decide not to lend to us — and if that happens, that could lead to a fiscal crisis,” with the Treasury losing access to raise money from markets, she said.

Gennadiy Goldberg, head of US interest rates strategy at TD Securities, said one thing staving off deeper concerns for now is that the nation’s nominal GDP growth rate — which is key for things like corporate revenues and tax receipts — is higher than US Treasury yields. The nominal year-on-year GDP gain for the second quarter was 6.3%. “A fiscal apocalypse is not upon us just yet,” Goldberg wrote in a recent note.

Managing, for Now

“Somehow we’re managing, even with interest rates going up,” Congressional Budget Office Director Phillip Swagel said in an Oct. 8 event in Minneapolis. At the same time, he cautioned that deteriorating fiscal dynamics do leave the nation increasingly prone. “Anytime there’s a negative shock, interest rates rise for whatever reason” there can be a “turbocharger effect.”

In that scenario, the shock of higher rates “feeds into the deficit, feeds into the debt, feeds back into interest rates to the economy,” said Swagel, whose agency in February projected that the debt-to-GDP ratio will hit a record surpassing 106% in 2030. The former Treasury official also said that, while he’s been delivering the same fiscal message for a long while, the past two years, market participants have been more interested.

Interest costs are now one of the top three biggest item on the list of federal outlays, after having more than doubled since just 2022. It’s only exceeded by Social Security and Medicare, the giant federal programs for older Americans, whose costs escalate each year as beneficiary rolls climb by the million. The Defense Department and Medicaid round out the top five.

The last time interest costs as a share of the debt were around current levels, American politics girded to address the challenge. President George H.W. Bush famously reneged on his no-new-taxes pledge by signing a package of increases in 1990, just before the interest-cost ratio peaked. His successor Bill Clinton went on to boost levies further in 1993.

Waiting on Catastrophe?

The end of the Cold War also saw a slump in spending on defense, bolstering the fiscal picture. By the late 1990s, a pickup in economic growth amid the diffusion of the internet and personal computing was propelling revenues.

Today, Bessent and other Trump administration officials have been touting the artificial intelligence boom as a growth stimulus that will help bring down the debt ratio. Budget experts, however, are skeptical. Spending on defense and entitlement programs appears set to keep climbing, while GDP gains aren’t likely to be fast enough to stoke revenues sufficiently, they say.

“The problems only getting worse, so we shouldn’t be debating whether to wait for the catastrophe — we should be working on it now,” Brett Loper, executive vice president of policy at the Peterson Foundation. “It’s going to be really hard to climb out of this problem.”

This year’s increase in net interest payments, at $81.4 billion, could be dwarfed if rates keep rising. The Fed is expected to hike its overnight benchmark rate — currently at 3.75% to 4% — at least once more, which would drive up the costs of the short-term debt Bessent has increasingly favored.

A 100 basis-point rise across the yield curve would drive up 2027 interest costs by $310 billion, according to calculations by TD Securities.

“I don’t think a fiscal crisis is imminent, we still have a pretty strong economy,” said Karen Dynan, a Harvard University economics professor who served at the Treasury in the Obama administration. And rates still aren’t back to levels from three or four decades ago, she noted.

At the same time, “with debt so high, net interest payments really matter — they will lead to a snowballing of debt,” she said. “The increase in interest rates and in interest payments relative to GDP, that may bring public pressure for action.”