Europe's middle class has been strong for 2 decades while America's was squeezed by an 'explosion of debt,' report says

• The World Inequality Report found that debt is why the US has more wealth inequality than Europe.
• The opposite used to be true, but mortgages and student debt put the US middle class in a bind.

America's middle class can thank mortgages and student debt for the country's major inequality.

On Tuesday, the World Inequality Lab published a report that examines the gaps between the global rich and poor. It delved into the evolution of wealth inequality in rich countries, and found that America's middle class has something that Europe doesn't: a ton of debt.

"One of the main differences between the two regions is that Europe has so far been able to maintain a relatively strong middle class, while in the US this group has been squeezed by an explosion of debt (particularly housing debt, which triggered the 2008 financial crisis)," the report said.

In the early 20th century, wealth inequality was very high both in the US and Western Europe due to a lack of reforms that would distribute wealth. Women did not have the right to vote, and it wasn't until 1965 that Black Americans could vote in southern states — political inequalities that significantly limited the power of the working and middle class to implement measures to fight wealth inequality.

Since 1980, inequality due to rising debt in the US began to outpace Europe. The middle 40% wealth share in the US dropped from 34% in 1980 to 28% today, while it remained at around 40% during the same period in France, for example.

"As a result, while Europe was significantly more unequal than the US in the late 19th and early 20th centuries, the reverse is true today," the report said.

The rise of student debt

Mortgage debt and student debt are two of the biggest types of debt Americans are burdened with, and they both were created under a vision of equality in post-World War II America.

This was the era when homeownership and education became the primary paths to achieving a prosperous ideal grounded in "the good life," Larry Samuel, author of "The American Dream: A Cultural History" and founder of consultancy firm Age Friendly Consulting, previously explained to Insider.

After the Soviet Union launched the first Earth-orbiting satellite into space in 1957, the US was worried it was falling behind. The Higher Education Act of 1965 under President Lyndon B. Johnson started the student-loan industry to give every American access to higher education. Instead, it became an industry that thrived off profits at the expense of borrowers, as the Wall Street Journal's Josh Mitchell explained in his book, "The Debt Trap."

The student-loan industry has come under fire by some Democratic lawmakers over recent years for taking advantage of student-loan borrowers and misleading them into taking on more debt than they can afford to pay off. That, coupled with high interest rates on loans, can leave borrowers trapped in a sometimes inescapable cycle.

"What I don't get is if I took out a certain amount, and I paid that amount already, and I still owe more than I originally owed, it's just nuts," one borrower previously told Insider. "It's mind-boggling to me that this total amount is not going down. It's not going away."

Today, the average American owes $32,000 in student debt — a huge drag on the net worth used to determine middle class status. Due to rising interest rates, many believe their student loans will follow them to their graves, while impacting their abilities to take out mortgages and receive federal benefits due to high debt loads.

The rise of a mortgage

A house in the suburbs complete with a white picket fence and a dog in the yard has been another staple of the American Dream born in the 1950s. Americans went wild with wartime savings, and material prosperity became the name of the game, with the suburban house and all the consumer trappings that came along with it leading the way.

Homeownership rates increased by 21% from 1940 to 1960. But as is always the case with supply and demand, so many people wanted to move into a McMansion in the proceeding decades that housing prices skyrocketed along the way.

Home prices have been going up for years, at a steeper rate than they did ahead of the Great Recession. By 2018, first-time buyers were paying 39% more than first-time buyers did at the same age nearly 40 years ago. The pandemic housing crisis, marked by a historic housing shortage and hot demand fueled by an urban flight, has only exacerbated the situation. The national median home sale continuously climbed upward before reaching a record high of $386,888 in June.

The soaring cost of housing boxes many middle class Americans out of buying. For those who can find a way to buy, it just means a heftier mortgage — especially if they opt for a down payment below the 20% standard. The average mortgage balance in America is $208,185, per a recent report from Experian.

As 27-year-old Ashley Nader, who has been house hunting for over a year, told Insider, "The American Dream is build on debt and no one actually owns anything."