The University of Phoenix Was Right: Forcing Students to Agree to Binding Arbitration is Unfair

In 2004, the University of Phoenix (UOP), the largest for-profit college in the country, took a principled stand on behalf of its students. Unlike many other for-profit schools, UOP refused to include a clause in students’ enrollment agreements that required them to settle any disputes with the schools through binding arbitration.

University of Phoenix officials didn’t think it was fair to make students sign away their right to have their day in court. “There’s the issue of whether students feel they have a meaningful choice in agreeing [to arbitrate],” Laura Palmer Noone, the university’s then-president, told The Chronicle of Higher Education at the time. “They may not even know the clause is in there, and we don’t want them to feel that we are trying to limit their rights.”

The University of Phoenix was correct. Requiring the mostly low-income students who attend for-profit colleges to sign away their right – often unwittingly – to bring cases before a jury in a court of law is deeply unfair and just plain wrong.

The Obama administration has lately been making the same argument that Noone made in 2004, as it looks for ways to curtail the practice. So why isn’t University of Phoenix backing these efforts? According to a new report from the Century Foundation, the giant for-profit institution now routinely includes mandatory arbitration clauses in its enrollment agreements. Apparently, University of Phoenix officials no longer have any qualms about limiting the rights of the school’s students.

As I’ve previously written in The Hechinger Report, “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 and compensate the third-party arbitration company that hear these cases, creating an incentive for arbiters to go easy on institutions in order to get repeat business.”

“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, according to the Century Foundation report, schools often include “gag clauses” that bar “students and former students from sharing information about their complaint – or about the complaint-resolution process – with anyone.”

These clauses appear to be the for-profit higher education’s latest effort to hide fraud and abuse that has run rampant throughout the industry. “While confidentiality agreements are frequently included in settlements to disputes, requiring consumer to keep their complaints secret seems to be a new strategy by companies to prevent tales of the disputes themselves from reaching the media or law enforcement agencies,” the report states. “Like requiring individual rather than group processes, the strategy also inserts a firewall between wronged students, reducing the likelihood that they will learn about each other’s complaints, preventing them from working together to seek a better resolution.”

The report’s authors – Robert Shireman, the former U.S. Department of Education official who is now a senior fellow at the Century Foundation, and Tariq Habash, a policy associate at the foundation – also found that some of the schools require students with grievances “to go through the institution’s internal grievance process prior to taking their complaints to arbitration.” Those who bring their complaints to federal and state regulators may be forfeiting their chance to even go through arbitration because they didn’t share their concerns with the schools first, the report states.

As the Century Foundation report makes clear, requiring students to sign mandatory arbitration clauses is not a standard practice throughout higher education. Traditional public and private non-profit colleges don’t use mandatory arbitration clauses presumably because they have a lot less to hide than for-profit schools.

Shireman and Habash call on the U.S. Department of Education to prohibit colleges that participate in the federal student aid programs from forcing their students to agree to binding arbitration and class-action bans. “When students choose a college, they have every reason to believe that the college is on their side, leading them to academic success and a bright future,” they wrote. “A college that takes advantage of students at that optimistic moment, requiring them to sign away their rights, does not deserve taxpayer support.”

Obama administration officials at the Education Department recently made clear that they have similar concerns. “No college” should be allowed to “dodge accountability by burying ‘gotchas’ in fine print that blocks students from seeking the redress they’re due,” Under Secretary of Education Ted Mitchell stated in March.

In the final round of negotiations on regulations to provide debt relief to borrowers defrauded by for-profit colleges, the Education Department has offered two alternate proposals that would allow defrauded students to file class-action lawsuits against their schools.

The Department has proposed barring colleges from requiring that students adjudicate their claims in arbitration. Under the plan, students would only go to arbitration if they agreed to it.

Alternatively, the Department would bar schools from prohibiting students from filing class-action lawsuits against their schools. The institutions, however, could still require students to bring their individual claims to arbitration 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 favor the first approach. But by the end of the negotiated rulemaking sessions, Education Department officials were leaning toward the second option.

But, as I wrote in The Hechinger Report, the Obama administration shouldn’t take “half measures.” I can think of no better way for the outgoing administration to burnish its legacy of putting students first than to stop schools, once and for all, from denying those who have been defrauded from having their day in court.

[Cross-posted at Ed Central]

Stephen Burd

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