Today the U.S. Department of Education announced much-needed improvements in the process for providing relief to former students of colleges that failed to deliver on their promises. As a result, student loan borrowers who were the victims of fraud will have a clearer path to having those loans canceled so they can move on with their lives. The department is to be commended for lifting that burden, and for taking steps to seek compensation from the schools for the harm done to students and taxpayers.
In addition to changing the borrower relief process, the department’s new rules take several critically important steps to prevent fraud from occurring in the future at colleges using federal student aid. A report I coauthored with Century Foundation senior fellow Robert Shireman in April found that many for-profit colleges have been inserting language into the paperwork students sign that divert students from seeking justice when they were wronged. The department has taken steps to limit or eliminate all four of the problematic practices we identified:
- Forced arbitration clauses prohibit students or former students from going to court to seek resolution of any complaints, such as in the case of a student seeking a refund for an inadequate education. Instead, the college requires students to take any complaints to an arbitrator in a private, binding process.
- Go-it-alone clauses prevent students or former students who have complaints from joining with peers who may have similar complaints against the school (such as through a group or class action). Instead, the contractual provision requires each student to seek resolution alone.
- Gag clauses order students to keep quiet about the complaint-resolution process, or about the details of any final ruling. These types of agreements have long been common in settlements of disputes, but they are now appearing in contracts and other documents that colleges require students to sign as a condition of enrollment, before a dispute even arises.
- Internal process requirements prohibit students from taking their complaints to government agencies or accreditors without first going through the school’s internal process.
Under the new rules, any student with a federal loan cannot be subjected to these types of fine print restrictive clauses with regard to any complaints that could lead to students’ loans being canceled. Further, the department has made it clear that schools must wait until a dispute arises before a resolution process is mutually agreed upon. These regulations send a clear message to all fraudulent institutions—you will no longer be able to hide your misrepresentations through private mandatory arbitration.
These regulations send a clear message to all fraudulent institutions—you will no longer be able to hide your misrepresentations through private mandatory arbitration.
The rule is a huge victory for consumers and taxpayers. By stopping them from hiding fraudulent practices, the rules will help to prevent colleges from using predatory practices in the first place. By banning the use of pre-dispute arbitration clauses in all forms, students can have their day in court if they choose, and both students and taxpayers can take comfort in knowing that it will be much harder for bad actors to defraud them.