One More Way States Can Step Up as Betsy DeVos Rolls Back Legal Protections

By Tariq Habash | February 14, 2020

While Washington continues to side with the student loan industry and predatory for-profit schools, states across the country have countered by taking action to protect students and borrowers. This includes legislation to regulate student loan companies, rein in aggressive debt collection practices, and create new programs to help ease student debt burdens. And now, states are stepping up to protect their taxpayer dollars from predatory schools.

For-profit schools have a long track record of engaging in fraudulent and deceptive tactics to entice vulnerable students to enroll—often charging significantly more than their nonprofit counterparts. Once enrolled, many of these students are pressured into taking out high-cost loans for what are often worthless degrees.

When students realize they spent years and tens-of-thousands of dollars chasing a worthless degree, they try to seek justice. But too often, these students find that the courthouse doors are slammed shut because of arbitration clauses buried deep within the fine print of their enrollment agreements with the school.

The all-too-common practice of including arbitration clauses in enrollment agreements is being used in higher education almost exclusively by predatory for-profit schools. These schools bury arbitration clauses deep within the fine print of their enrollment contracts as a way to force students to sign away their legal rights.

Last week, Virginia took an important step to address this problem by passing legislation out of the House of Delegates with a large, bipartisan vote to protect state funding from schools that enforce pre-dispute arbitration clauses. Additionally, the Virginia proposal would increase transparency of arbitration proceedings for schools that do not receive state funding. Just yesterday, New Jersey introduced a similar bill to protect state aid, expanding the applicability of the funding protections to cover both educational and job training funds.

Virginia and New Jersey are not alone—Connecticut, New York, Colorado, and more states are positioned to provide students and higher education regulators with more information about arbitration proceedings while also taking steps to protect limited state aid from going to schools that choose to restrict students’ rights.

So, what do states need to know?

1. What is a forced arbitration clause?

Arbitration is a dispute resolution process originally designed to provide businesses an alternative to litigation when trying to resolve disagreements with each other. Too often, corporations have used arbitration as a way to tip the scales against consumers and workers, forcing individuals to consent to private arbitration before disputes arise. Because arbitration proceedings are private, it is impossible for regulators, law enforcement, or even other arbitrators to recognize patterns of wrongdoing that could help hold corporations responsible in future disputes. Furthermore, arbitration often limits any potential damages that might be awarded, meaning there is no incentive for the company to act responsibly.

2. Why are arbitration agreements bad for consumers and students?

In theory, disputes are arbitrated by a neutral third-party, which should lead to a fair outcome. However, research shows that in practice, arbitration rarely ends up in favor of the consumer. These skewed results are due to several factors. First, companies typically get to choose the arbitrator, making the company a repeat customer. As one study notes, “because arbitrators are likely to want to do business with a company in the future, they have a built-in reason to side with the company over the consumer.”

Second, the consumer is likely to receive minimal, if any, relief. Forced arbitration clauses often put additional burdens on parties, like requiring them not to divulge any information about the nature of the dispute, how the arbitrator ruled, or the final remedy. One of the most powerful tools allowing consumers to stand up to large corporations is the ability to band together to form a class action. Arbitration clauses are often joined by class action waivers that remove this right while simultaneously limiting potential relief available to any individual consumer. Across the country, thousands of former students were exposed to forced arbitration by schools like Corinthian Colleges and ITT Technical Institute that have long since shut down. Arbitration clauses were in effect used to silence these students, leaving them and thousands more with mountains of debt and no degree while companies keep harmful practices out of the public eye.

3. Why isn’t the federal government taking action to protect students?

In 2016, the Obama Administration created new rules that protected student loan borrowers from schools using forced arbitration in their enrollment contracts. While the Department of Education did not ban the use of arbitration agreements outright, it used its authority under the Higher Education Act to impose conditions on schools wishing to participate in the Direct Loan Program.

This past year, the Department of Education, under Secretary Betsy DeVos, gutted these protections, yet again siding with a predatory industry at the expense of millions of student loan borrowers. And these rules will be officially rescinded on July 1, 2020 barring legal challenges—the urgency for states to act to protect students is real and immediate.

4. How can states take action to protect students?

States can play a critical role to both protect students’ rights and preserve limited state resources in the process. Despite some limiting case law, states retain the right under the Commerce Clause to “operate freely in the free market.” Just last week, a district court judge ruled against an association representing for-profit schools in its challenge of the Obama era conditions to limit the enforcement of arbitration agreements—upholding the market participant legal theory being used by states like Virginia and New Jersey.

When choosing to participate in any given market, a state has authority to determine with which companies to do business, including higher education companies. A state can choose to spend public funds only on companies that operate safely, fairly, and with accountability. Because a state is limited in its ability to monitor companies with which it does business on a day-to-day basis, a state may need to rely on private litigation to measure quality and safety of products. Where forced arbitration agreements make it easier for businesses to get away with wrongdoing with limited transparency, a state can opt not to distribute its limited taxpayer dollars to the business using them. In effect, a state can choose only to fund schools that do not include arbitration agreements in enrollment contracts, because that is the safer option for students and taxpayers.

For schools that use forced arbitration but do not receive public funds, states can still increase transparency around arbitration by creating reporting requirements. States can require schools operating within their jurisdiction to share critical information about the frequency, nature, and outcome of arbitration proceedings with students prior to enrollment. This has already been accomplished in Connecticut, where State Senator Matt Lesser has created the pathways for the state authorizer to collect this information.

The roadmap for how states can take action to address this predatory practice is becoming clear.   

In the wake of the Trump administration’s assault on the rights of students and student loan borrowers, protecting taxpayer dollars and providing students with transparency about disputes is another important example of where states are stepping up for students.

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Tariq Habash is Head of Investigations at the Student Borrower Protection Center.