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Education Department Can Refuse Federal Loan Money to Schools That Require Students to Arbitrate, Court Says

Statement of Adam Pulver, Attorney, Public Citizen Litigation Group

Note: In a decision today, the U.S. District Court for the District of Columbia upheld a 2016 regulation issued by the U.S. Department of Education under which institutions of higher education are ineligible to participate in federal student loan programs if their contracts with students require arbitration of claims against the schools or prohibit students from bringing class-action lawsuits against the schools. The decision was issued in a case brought by the California Association of Private Postsecondary Schools against the department in 2017. Attorneys from Public Citizen Litigation Group and the Harvard Law School Legal Services Center’s Project on Predatory Student Lending joined in the defense of the regulations on behalf of Megan Bauer and Stephano Del Rose, two former students of a now-defunct for-profit school. The court’s opinion upholding the validity of the arbitration and class-action provisions closely tracked the arguments made on behalf of Bauer and Del Rose. As part of a student-unfriendly rewrite of the regulation, the department has rescinded the arbitration and class-action provisions, effective in July 2020, however.

Today’s decision provides a thorough explanation of why the Department of Education can condition a school’s participation in federal aid programs on its agreement not to require students to arbitrate or give up their right to participate in class actions. The predatory private school industry’s argument that the agency’s action violates the so-called “pro-arbitration policy” of the Federal Arbitration Act doesn’t wash. Under the rule, the government won’t subsidize schools unless they agree not to interfere with students’ ability to assert their rights in court if a dispute later develops. Nothing in the Federal Arbitration Act requires the federal government to provide financial benefits to schools if it concludes that use of arbitration agreements by the schools is contrary to the government’s responsibility to maintain the integrity of the student loan program.

The department’s amendment of its rules, effective July 2020, will, if upheld by the courts, deny many students the benefit of this decision. In the meantime, we call on the education department to enforce the 2016 rule against schools that violate it while it is in effect.

Today’s decision is an important affirmation of the power of federal agencies to condition their distribution of federal financial benefits on the recipients’ agreement not to use arbitration agreements in ways that harm the interests of the public. It is our hope that federal agencies, including the Education Department will, someday soon, again recognize their responsibility to use that authority to protect citizens.

The case is California Association of Private Postsecondary Schools v. Elisabeth DeVos, U.S. District Court for the District of Columbia, No. 17-999.