Public Citizen Commends Education Department for Combating Arbitration Clauses in Higher Education, Urges a Stronger Approach

An effort calling on the U.S. Department of Education to halt federal funding for predatory schools that deny students' access to the courts reached a milestone today, as the department released a proposed rule designed to protect students who have been victimized by predatory colleges and career training programs.

The department's proposal includes a provision that would condition federal aid on a school's agreement, under some circumstances, not to force students into private arbitration when they have a legal claim against the school.

Predatory colleges and career training programs have long engaged in fraud when recruiting and enrolling vulnerable students, many of whom rely on federal loans to get an education. These schools have largely gotten away with fleecing their students and U.S. taxpayers by requiring students, as a condition of enrollment, to waive the right to go to court to resolve future disputes with the schools, and instead requiring students to bring cases through binding arbitration.

"The Department of Education's proposed rule is an important step toward turning the tide on the use of forced arbitration by predatory for-profit schools," said Julie Murray, attorney for Public Citizen. "The proposal would save U.S. taxpayers money and help to make whole the thousands of students who are being swindled by hucksters masquerading as schools. We do, however, have concerns that the department's proposal would continue to permit schools to use pre-dispute arbitration agreements against vulnerable students by portraying the agreements as 'voluntary,' even when students feel compelled to sign them."

Pre-dispute arbitration clauses, also known as "rip-off clauses," force students to bring their claims against schools in binding arbitration--a private process that lacks a judge and jury and provides very limited right to review by a court. Most students don't know that forced arbitration clauses are buried in the fine print of the contracts when they enroll to receive an education. Later on, if the school ends up being a sham, the students are pushed into private arbitration, where most lose and have no real opportunity to appeal.

In February of this year, Public Citizen filed a petition (PDF) with the department requesting that it issue a rule to deny Title IV funding to colleges that require binding arbitration of any disputes that may arise between the students and the schools. The petition was supported by a coalition of 47 student, veteran, civil rights, consumer protection and civil justice organizations.

"A comprehensive rule would eliminate a tool that schools have used against students with legitimate claims," said Sonia Gill, counsel for civil justice and consumer protection for Public Citizen. "We applaud the Department of Education for taking this important step but urge it to adopt a rule with teeth to protect the interests of students and families when they are defrauded by unscrupulous schools engaged in predatory practices."

Public Citizen will continue to work with the department to further strengthen the proposed rule. In particular, the final rule should prohibit all pre-dispute arbitration agreements with students, not just those that a school expressly conditions on a student's enrollment or right to continue at a school; broaden the scope of covered claims; and ensure that all students, not just federal borrowers, are covered by all portions of the rule if they attend a school that receives federal aid.