Students Shouldn’t Have to Give Up Legal Rights to Enroll in For-Profit Colleges

If Obama administration means what it says, it must end mandatory arbitration for defrauded college students

Students who believe they’ve been defrauded by for-profit colleges might get their day in court, as the Obama administration weighs whether to ban mandatory arbitration in such cases. But while the administration’s proposal is long overdue, it may not go far enough.

Over the last decade, the for-profit higher education industry has succeeded—with the help of the U.S. Supreme Court—in stripping students of their right to bring lawsuits, including class-action cases, against their schools. For-profit colleges, which enroll large numbers of low-income students, have achieved this by including a clause in students’ enrollment agreements that requires them to settle any disputes with the schools through binding arbitration. By signing these documents, students sign away their right, often unwittingly, to bring their cases before a jury in a court of law.

Mandatory arbitration agreements—which have become increasingly common in all sorts of consumer contracts, including those for credit cards and private student loans—put students with legitimate grievances at an extreme disadvantage compared with pursuing their cases in court. For one thing, for-profit colleges select the third-party arbitration company that hears the case, creating an incentive for arbiters to go easy on institutions in order to get repeat business.

Related: The perils of enrolling in for-profit colleges

Binding arbitration clauses tend to bar class-action lawsuits, forcing each student who has been harmed to bring his or her individual case against a school. Industry officials know that most students are unlikely to pursue their cases because of the cost of doing so. In addition, discovery is often limited in arbitration, making it difficult for students to gather evidence of wrongdoing. And arbitration decisions generally cannot be appealed.

Further, as the U.S. Department of Education stated in a recent news release, “Some agreements require disputes to be filed in secret tribunals where little or no records are kept; some prohibit students from speaking about the claims they file.” As a result, unscrupulous schools are able to keep federal and state regulators in the dark when crimes have been committed.

Related: Once-high-flying private, for-profit universities seek turnaround strategies

Although many for-profit college companies have included mandatory arbitration requirements in enrollment agreements for years, these clauses were not always ironclad. Some states, like California, have long had consumer protection laws that frown on the use of binding arbitration requirements banning class-action lawsuits and jury trials. Courts in those states have previously allowed students scammed by shady schools to move ahead with legal challenges.

However, in 2011, the Supreme Court changed the rules of the game. In AT&T Mobility LLC v. Concepcion et ux., the nation’s highest court ruled that states can’t reject arbitration clauses as “unconscionable” solely because they bar class-action lawsuits and jury trials. That decision shut down access to the courts for most for-profit college students, as well as for consumers of many financial products.

Even judges sympathetic to students’ complaints say their hands are tied as a result of the Supreme Court’s 2011 ruling. In his opinion in a case that students brought against Westwood College for significant recruiting abuses, Judge William J. Martinez of the U.S. District Court in Denver wrote in 2011 that he regretted having to require the plaintiffs to settle their dispute through arbitration. “There is no doubt that Concepcion was a serious blow to consumer class actions and likely foreclosed the possibility of any recovery for many wronged individuals,” he stated.

Related: A better way to judge a college’s commitment to serving low-income students

At the urging of consumer activists and Democratic lawmakers, the Obama administration has decided to take the matter into its own hands. In the final round of negotiations on regulations to provide debt relief to borrowers defrauded by for-profit colleges, the Education Department floated two alternate proposals to ensure that defrauded students can bring class-action lawsuits against their schools.

One proposal would bar colleges from requiring that students adjudicate their claims in arbitration. Students would only do so if they agreed to it.

The second proposal would prohibit colleges from blocking students from filing class-action lawsuits against their institutions. The schools, however, could still require mandatory arbitration of individual students’ claims as long as the proceedings “are open to the public and recorded and transcribed with such recordings and transcriptions available to the [Education] Secretary upon request.”

Consumer advocates favored the first approach. But by the end of the negotiated rulemaking sessions, Education Department officials were leaning toward the second option. They said they weren’t sure they had the authority to ban mandatory arbitration altogether.

Related: How a regulatory blind spot puts the integrity of nonprofit higher ed at risk

Groups advocating on behalf of students and consumers blasted the Education Department for considering adopting the weaker approach. Public Citizen, a nonprofit organization that had petitioned the Obama administration to prohibit mandatory arbitration, called the Department’s reasoning “inexplicable.”

“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 the solution endorsed by the department this morning is insufficient to address the problem,” Julie Murray, an attorney for the organization, wrote.

“Requiring schools to forgo forced arbitration that harms students and taxpayers is both reasonable and the most sensible way forward,” she said.

Steve Gunderson, the for-profit colleges’ chief lobbyist, also blasted the Obama administration, arguing that the Department’s proposals to limit mandatory arbitration were part of “an ideological effort” to kill the for-profit higher education industry.

“Despite efforts by the Department, and its ideological allies, to try and pass arbitration as nefarious and anti-student—the fact is arbitration is used all across the country, every day by parties on all sides of all issues,” said Gunderson, who is president of the Association of Private Sector Colleges and Universities. “Every American carrying a credit card today has agreed to arbitration in the event there is a dispute between the cardholder and their bank. To portray arbitration as exceptional or highly unique to higher education is ridiculous.”

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But nobody is arguing that binding arbitration is “exceptional or highly unique to higher education.” We all know it is widespread. We also all know it is deeply unfair to consumers, including the low-income and minority students who all too often are lured by the false promises of certain for-profit colleges.

As Education Department officials said when they introduced their proposals, “no college” should be allowed to “dodge accountability by burying ‘gotchas’ in fine print that blocks students from seeking the redress they’re due.”

If the Obama administration means what it says, then it needs to put an end to mandatory arbitration for individuals and groups of students alike. Half measures simply won’t do.

[Cross-posted at The Hechinger Report]

Stephen Burd

Stephen Burd is a senior policy analyst in the Education Policy Program at the New America Foundation.