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NOTE TO REPORTERS: Education Department Expected to Propose Rule to Combat Forced Arbitration

June 8, 2016

NOTE TO REPORTERS: Education Department Expected to Propose Rule to Combat Forced Arbitration

Public Citizen Pushes for Stronger Student Protections

As soon as this week, the U.S. Department of Education is expected to issue for public comment a proposed rule designed to ensure that students at predatory schools can hold the schools accountable in court for wrongdoing. Public Citizen petitioned the department for such a rule in February.

The proposed rule, which is part of a broader package of proposals to protect students, is expected to address the use of forced arbitration clauses in student contracts used by for-profit colleges and other trade and technical schools receiving federal aid. Forced arbitration clauses require students to sign away their legal rights by agreeing to submit to binding arbitration any disputes that might arise between the student and the institution. Over the past few months, 30 U.S. senators (PDF), 47 organizations and more than 21,000 citizens have joined the call for a strong rule from the Department of Education barring such contract provisions.

Few students are aware that arbitration clauses are in their contracts or that these clauses preclude them from going to court or joining with other students in suits to address misconduct by their schools. Even when they do know, many students feel compelled to sign, because refusing means forgoing the educational benefits they hope to receive.

The procedures and conditions of arbitration overwhelmingly favor the schools: Arbitration proceedings are shrouded in secrecy, do not allow for a jury and offer few grounds for court review. Even clear legal and factual errors by arbitrators may be an insufficient basis for overruling an arbitrator’s decision.

Public Citizen’s petition (PDF) urged the Department of Education to bar educational institutions from including pre-dispute, forced arbitration provisions in enrollment or other agreements with students as a condition of receiving Title IV assistance, which includes Stafford, PLUS and Perkins loans as well as Pell grants.

In March, the department expressed an interest in combating the use of forced arbitration to block predatory schools from insulating themselves from liability for wrongdoing. However, in negotiations with various stakeholders, the department suggested that it might take a narrower approach than Public Citizen had requested. Under the department’s March proposal, schools could not force students to arbitrate class-action claims, but could continue to force individual claims and claims brought by small groups of classmates into arbitration.

In addition, the March proposal would apply only to federal borrowers. Students who attend schools receiving federal aid but who do not take out federal loans would not receive any protection against forced arbitration. Furthermore, the March proposal would cover only claims related to borrowing and educational services financed by that borrowing, leaving open the possibility that predatory schools could argue that forced arbitration remains permissible for many types of claims, including those based on false advertising and fraud at the time of enrollment.

Public Citizen appreciates the department’s recognition that students and taxpayers suffer serious harm when predatory schools impose forced arbitration clauses on their students but has urged (PDF) the department to issue a stronger proposed rule for public comment than the approach it suggested in March.

The dangers of forced arbitration clauses for students and taxpayers are evident in the circumstances leading to Corinthian Colleges’ demise. Corinthian, a for-profit school, vigorously enforced pre-dispute arbitration clauses against students who brought claims against it in court, a practice that hampered students’ ability to seek restitution for alleged fraud and limited regulators’ access to information about student grievances.

The few students who proceeded to challenge Corinthian in arbitration fared poorly. Between 2011 and 2015, only one student who arbitrated against Corinthian through the American Arbitration Association, Corinthian’s designated arbitration firm, received an award in his or her favor. Although the federal government has found that many Corinthian students were victims of the school’s wrongdoing, Corinthian will not be able to reimburse U.S. taxpayers for the more than $42 million (and counting) in debt relief (PDF) that the federal government has provided to students who attended Corinthian-owned schools. Corinthian has long since filed for bankruptcy and closed its doors.

The Department of Education must offer a comprehensive approach to forced arbitration to prevent other predatory institutions from defrauding students and leaving taxpayers with the bill. Requiring schools that receive federal funds to forgo forced arbitration entirely is the best way forward.