MarketWatch:The government paves the way for students to file class-action lawsuits

Published: Mar 14, 2016 4:31 p.m. ET

The U.S. government wants to make it easier for student loan borrowers to sue their colleges when they believe they’ve been wronged.

The Department of Education released a proposal Friday evening that would make it more difficult for colleges to require students to settle disputes in arbitration, a private, closed-door process that critics say prevents students from getting a fair shake when they raise issues about their schools.

“The Department is working to ensure that no college can dodge accountability by burying ‘gotchas’ in fine print that blocks students from seeking the redress they’re due,” Ted Mitchell, the undersecretary for the Department said in a release.

Critics say for-profit colleges regularly include so-called mandatory pre-dispute arbitration clauses — or provisions that require students to litigate claims in arbitration instead of going to court — in the agreements they require students to sign when they enroll at the school. In addition to barring students from taking their claims to court, the clauses also can prohibit students from bringing claims as a group. Those provisions can have a chilling effect on student suits, critics say, because individuals have to bear the often expensive cost of arbitration alone.

Businesses of all types increasingly deployed arbitration clauses in cellphone plans, credit card agreements, employment contracts and other areas (including banks) over the past several years. Companies and their lawyers often argue that class-action lawsuits are more about enriching plaintiffs’ lawyers and less about helping consumers. In addition, they say, arbitration provides a cheap and efficient way for consumers to get relief. Thanks to two Supreme Court decisions in 2011 and 2013, the agreements and the class action bans that often come with them are typically difficult to challenge in court, forcing consumers to settle disputes over bills, employment discrimination and other issues through the arbitration process.

Critics of mandatory arbitration say the clauses have no place in higher education. “I just don’t think that there’s a plausible justification for using these provisions in an educational context and I think that becomes clear the more you examine the way that they work,” said Eileen Connor, the director of litigation at the project on predatory student lending at Harvard Law School, who pushed the Department to curb schools’ use of mandatory arbitration clauses.

The Department’s proposal regarding mandatory arbitration is part of a larger, months-long rulemaking process to set clear standards for how and when borrowers should have their federal student loans forgiven if they believe they’ve been defrauded by their schools. In the wake of the collapse of for-profit college chain, Corinthian Colleges, last year amid scandal, borrowers have been clamoring for debt forgiveness. Connor, who previously submitted a proposal on behalf of the legal aid community as part of the negotiated rulemaking process that would ban schools that use mandatory arbitration agreements from receiving federal financial aid dollars, called the Department of Education’s proposals on arbitration “fantastic.”

Steve Gunderson, the CEO of the Association of Private Colleges and Universities, disagreed, saying he was disappointed with the Department’s proposal. Gunderson noted that arbitration clauses have been a part of higher education since the 1970s to protect faculty as part of collective bargaining agreements.

“Our attitude has always been to try to find a way to protect students,” he said. “Lawyers are the ones who make the money” off class action suits, he added.

The Department proposed two possible routes to curbing mandatory arbitration in a draft rule it released ahead of the final negotiating session with stakeholders this week. Both would make it easier for students to bring claims together. One would require a student to give consent to move a claim to arbitration. The other would require that any arbitration proceedings be open to the public and recorded. Since arbitration sessions are typically held behind closed doors, any violations of law discussed in the sessions rarely come to light.

Julie Murray, a staff attorney at Public Citizen, a nonprofit advocacy group that submitted a petition to the Department last month asking the agency to make a rule barring schools that use mandatory pre-dispute arbitration clauses from receiving federal financial aid funding, said the option that requires a student’s consent to move to arbitration goes further to protect students than the Department’s other proposal.

The other proposal “gets at some of the most egregious aspects of (arbitration clauses) without getting at the root of the problem, which is putting students into arbitration at all,” she said. “That being said, we’re pleased to see what the Department said on Friday and we’ll be intrigued to see how the negotiations unfold this week.” Regardless of whether either of the Department’s proposals are included in any new rules, the Department still has to respond separately to Public Citizen’s petition, Murray said.

The Department’s proposal is just the first step of many before the provisions actually become law and there’s a chance that won’t even happen. At the final negotiating session next week, stakeholders will discuss the arbitration proposal, among others. If the group, which includes consumer advocates, for-profit college representatives and others, reaches a consensus, the Department will put forward a proposed regulation for comment. If the negotiators don’t reach a consensus, the Department has to decide whether to move forward with the regulations.

“I’m delighted that the Department listened to the proposal and really hopeful that we’ll see something in the final rule along these lines,” Connor said.

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