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Government bans arbitration settlements between students and colleges

By Drew Cloud, for the Port Arthur News

The Department of Education has recently announced that arbitration settlements between colleges and students will be banned. Previously, colleges were able to require students to agree to settle any claims they might have had against the school in an arbitration agreement as an enrollment condition. Such pre-dispute arbitration clauses were widespread throughout for-profit colleges. Almost all students who enrolled in a for-profit college and who received federal financial aid were required to agree to the arbitration clause, according to a report released by the Century Foundation. At nonprofit institutions, the number is significantly lower.

The effect of pre-dispute clauses

According to consumer advocates, such clauses prevent students from being able to seek justice within a court of law. Instead, they are forced to settle any claims they might have in arbitration. Advocates have further insisted that this private process tends to favor businesses.

Arbitration clauses mean that students who feel they have been wronged by a school have few recourses available to them, such as requesting that the federal government discharge their student loans. Unfortunately, discharging student loans results in a significant cost to taxpayers. With the ban on court action now lifted, students will be able to seek their day in court while also requesting financial relief directly from their colleges.

The ban on arbitration comes on the heels of two for-profit colleges announcing they were voluntarily ceasing pre-dispute arbitration requirements. For-profit colleges have received a significant amount of criticism over the last year. Some of the criticism comes from the fact that for-profits account for 35 percent of all student loan defaults, exploit veteran loopholes and many graduates leave campus without employable skills. The Consumer Financial Protection Bureau has also recently considered restricting the use of arbitration clauses in numerous financial products.

Such a ruling represents a significant advantage for students who have been prevented from seeking relief in a courtroom in the past. In addition to applying to new enrollment agreements, the ruling will cover existing agreements. This means that students who feel they may have been duped and who have already agreed to a pre-dispute arbitration claim will still have the opportunity to seek recompense in court.

Consumer advocates believe that the new rule will save taxpayers a tremendous amount of money. Students who may have been adversely affected could have significant damages. In the past, taxpayers were left footing the bill. Now, that will no longer be the case.

Far-reaching regulations

The announcement is part of a much larger set of final regulations released by the feds affecting when as well as how borrowers who believe they may have been wronged can have their student loans forgiven. For the last 25 years, federal student loan borrowers have been able to have their student loans forgiven if they were misled by their school. In order to have their debts wiped away, however, borrowers needed to go through a defense to repayment process. Few students filed such claims, however. Recently, the Department of Education has clarified the process for borrowers requesting discharges. The new rules will go into effect July 1, 2017. To date, the Department of Education has discharged student loans for thousands of borrowers, amounting to more than $247 million in student loan debt relief.

The final rule issued by the Department of Education bans pre-dispute arbitration agreements for defense claims by all schools that receive Title IV assistance as well as a new federal standard that would evaluate defenses for repayment of direct loans. Borrower defense refers to an omission or act by a school in relation to the making of a direct loan.

Under the new regulations, the Secretary of Education has also been granted discretion to permit group discharges in situations in which groups of students are believed to have been subjected to the same type of misrepresentation or wrongdoing. Even if they did not request relief, borrowers may be able to have their loans discharged if the Secretary of Education identifies them as the victims of wrongdoing by their schools.

Consumer advocates have long argued that such forced arbitration clauses are not only detrimental to students but also present obstacles to government watchdogs who work to uncover wrongdoing at institutions of higher learning.

Little oversight and massive financial obligations

 Each year, the federal government spends approximately $128 billion under Title IV of the Higher Education Act on student aid. Even so, according to consumer advocates, many for-profit schools continue to prey on what they say are some of the most vulnerable segments of the population with fraudulent recruitment practices. Making the situation even worse, advocates say that many of these institutions provide students with an inferior-quality education with few support services, low-quality programs, and low graduation and job placement rates.

After realizing the misrepresentations made by the schools, some students elect to drop out of school. Those students who remain in school graduate with a degree they cannot put to use. The wrongdoing by such schools leaves students with massive financial obligations just as they are graduating; financial obligations they often are not able to repay. Unfortunately, since these students were required by their schools to sign a pre-dispute arbitration in order to be allowed to enroll in school, they have no way to seek justice in court.

Relatively few students are even aware that such clauses exist in their enrollment contracts or that such clauses prevent them from participating in class-action suits or going to court to respond to the wrongdoing conducted by their schools. Even when students are aware, they often feel as though they have no other choice but to sign the contracts, as refusing to sign means they will not be able to enroll in school.

The arbitration process generally provides little benefit to students, as the proceedings themselves do not allow for court review or the oversight of a jury. Even in cases in which arbitrators make clear errors, there is often little basis for the arbitrator’s decision to be overruled. Such forced arbitrations also mean that the ability of regulators, such as the Department of Education, to identify and correct such wrongdoing is severely limited.

Thanks to the new ban on such pre-dispute clauses, students as well as regulators and government watchdog groups will have far more avenues open for uncovering as well as addressing potential wrongdoing by schools.