Predatory Schools That Deny Students' Legal Rights Should Not Receive Federal Funding

The U.S. Department of Education should deny Title IV funding to for-profit and other schools that require students to sign away their legal rights and submit to binding arbitration in future disputes with their schools, Public Citizen said today in a petition (PDF). Forced arbitration clauses are detrimental to students and hamper efforts by government watchdogs to uncover wrongdoing at these institutions, Public Citizen's petition says. The petition echoes a recent letter sent by nine U.S. senators to the Department of Education asking the agency to take action on the use of these clauses.

The petition urges the Department of Education to issue a rule barring educational institutions from including pre-dispute arbitration clauses 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. Pre-dispute arbitration clauses require students to submit any future dispute with their school to an arbitrator who makes a final decision.

"Taxpayers should not have to subsidize predatory schools that deny their students a day in court," said Julie Murray, an attorney with Public Citizen and author of the petition. "The Department of Education should work quickly to protect students and their families from predatory schools trying to immunize themselves from accountability for their wrongdoing."

The federal government spends more than $128 billion each year on student aid under Title IV of the Higher Education Act. Yet even as they benefit from taxpayers' largesse, many for-profit schools prey on vulnerable populations of students - particularly people of color, low-income individuals and veterans - using fraudulent recruitment practices. Many of these schools provide an inferior education with low-quality programs, few support services and abysmal graduation and job placement rates.

Some students at such schools drop out after they realize the extent of their school's misrepresentations. Those who remain graduate with a worthless degree. In either case, the school's wrongdoing leaves students with significant financial obligations to the federal government that they cannot repay. But the courthouse doors are closed to these students if their school required them to sign a pre-dispute arbitration agreement as a condition of enrollment.

Few students are aware that these clauses are in their contracts or that the clauses preclude them from going to court or joining with other students in class-action 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.

Forced arbitration also limits the ability of the public and regulators - including the Department of Education - to uncover and address wrongdoing by schools. In many cases, litigation sounds the alarm on a school's unlawful practices. Students who filed claims against Corinthian Colleges were forced into arbitration for years before government investigations began to uncover wrongdoing at the institution. The school subsequently collapsed and filed for bankruptcy.

The Higher Education Act allows the Department of Education to cut off Title IV funding to schools that are not capable of providing the education they promise, and it permits the agency to impose conditions on funding. The rule sought by Public Citizen's petition is within the department's authority and should be adopted without delay, the organization maintains.