How It Works
Let’s recap:
- The national debt is the amount of money that the U.S. government owes its lenders.
- It is the result of fiscal policy decisions made throughout our country’s history.
- In 2026, the national debt reached $39 trillion.
In this section, we’ll cover:
- The main categories of debt.
- Why the government needs to borrow.
- How it actually borrows.
- Who it borrows money from.
categories of debt
The main categories of debt
Let’s start with some definitions. That $39 trillion the government owes is called the gross national debt. It is made up of two categories: intragovernmental debt and public debt. The main difference between the two is who is lending the government money.
Intragovernmental debt is a collection of “IOUs” that the government writes itself to transfer money from one agency or program to another. Put simply, it’s the government borrowing money from itself. At $7.6 trillion in 2026, it makes up about 20 percent of gross debt. It represents real obligations that the government will have to cover at some point, but for now, intragovernmental debt only exists on a spreadsheet. You can almost think of it as “Monopoly money” within the federal government.
That’s why we’re going to focus our attention on public debt, which is the amount of money that the federal government owes to other entities. At $31.4 trillion, it makes up the other 80 percent of gross debt and is also referred to as “debt held by the public.” Public debt affects you more directly because that debt is a part of the U.S. economy.
WHY MONEY IS BORROWED
Why the government needs to borrow money from the public
The federal budget is a combination of how much the government spends (“spending”) and takes in (“revenue”) each year. When spending exceeds revenue, it’s called a deficit.
The federal government has run a deficit during 46 out of the last 50 years. When that happens, it needs to borrow money to fill the gap between spending and revenue.
In 2026, the government is projected to spend $7.45 trillion and take in $5.6 trillion, creating a deficit of $1.85 trillion. That means it will need to borrow money… a lot of money.
That money will come from the public.
HOW MONEY IS BORROWED
How the government borrows money from the public
Say you want to borrow money. For something large like a car or house, you would take out a loan with interest.
When the government wants to borrow money, it sells U.S. Treasury bonds to the public. Bonds are basically loans to the government. When someone buys a bond, the government can spend their money immediately, while promising to pay them back with interest in the future.
That’s right. Borrowing money is never free — for you or even for the federal government. Interest rates are the “price of borrowing money.” If you took out a loan, you’d be charged an interest rate depending on various factors, such as:
- Economic conditions.
- How long you’ll take to pay off your loan.
- The riskiness of lending you money.
Interest rates on bonds work the same way. The public buys bonds because they can make money from the interest the government promises to pay them.
They can purchase those bonds on the bond market. Like all financial markets, the bond market is built on trust and predictability. Treasury bonds are historically viewed as one of the safest investments in the world because the U.S. government has always fulfilled its promise to pay back its debts on time and with interest.
WHO IS LENDING?
Who is lending the government money
You may be wondering: Who makes up this mysterious “public” that buys these trillions of dollars worth of bonds? The federal government actually sells bonds to several entities, both at home and overseas. Believe it or not, some of these lenders may include you or people you know.
See why you might be on this list? If you have a 401(k) or an individual retirement account, check to see if there are any Treasury bonds in it. If there are, that means the government owes you money.
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