Historically, mandatory pre-dispute arbitration clauses in college enrollment contracts have been commonplace at for-profit institutions. These provisions—which prohibit students or former students from going to court to seek resolution of any complaints, such as a student seeking a refund for an inadequate education—raise serious consumer protection concerns.
In 2016, the Obama administration effectively banned mandatory arbitration clauses by prohibiting federal student loan dollars from being used at schools that had these clauses in their enrollment contracts—only to have the Trump administration, through a regulatory process, reverse the ban in 2019, allowing them potentially to be used in contracts again starting July 2020.
In the absence of a federal rule prohibiting mandatory arbitration clauses in enrollment contracts, states can take action to protect consumers by applying pressure on colleges at the state level.
Arbitration Disfavors Borrowers and the Public
Mandatory arbitration facilitates secrecy about potential problems at colleges because it prohibits students from seeking redress in court. The process also disadvantages consumers, and creates unfairness for students when schools and those providing arbitration services.
Mandatory arbitration facilitates secrecy about potential problems at colleges because it prohibits students from seeking redress in court.
A pre-dispute arbitration clause in a contract binds the signee to arbitration before any conflict arises, a process that requires the parties of a dispute to handle all grievances out of court, through an arbitrator—not a judge, but rather a private party who oversees the dispute and is tasked with getting both parties to agree to a settlement. (These clauses also often include a waiver of the right to bring a class action, limiting the ability of consumers to pool their resources and facts for a stronger case.) In other words, mandatory pre-dispute arbitration clauses in college enrollment contracts prevent students from seeking redress through the court system.
Students who have signed contracts with mandatory arbitration clauses who later have a complaint against the school cannot get their day in court, and because the enrollment contracts typically include gag clauses that prevent students from sharing information about their complaint and the results of the arbitration with outside parties, their complaints are effectively silenced. They are heard only through a secretive process that prevents information from becoming public through the court system—ultimately shielding bad actors from public accountability.
Arbitration not only has negative ramifications on public accountability, but research shows that individual consumers that go through arbitration rather than the courts are less successful in receiving a favorable decision, and less likely to obtain relief. Furthermore, arbitration is neither faster nor less expensive than seeking judicial redress. (This fact didn’t stop the Department of Education from making an unsubstantiated claim in a proposed rule.) In fact, only 9 percent of disputes that go to arbitration end with relief for the consumer. The circumstances of college-student arbitration also creates a systematic bias in favor of the institutions. Institutions may understand the system better, and thus avoid arbitrators who continually rule in favor of consumers, or better understand how to make successful arguments with particular arbitrators; arbitrators, who are often chosen by the schools, may even have an incentive to decide in favor of the institutions in order to attract customers. The dynamics of this relationship creates unfairness.
A review of college enrollment contracts at 271 schools conducted by The Century Foundation in 2016 found that pre-dispute arbitration clauses were particularly common at for-profit colleges.
DeVos Department Reverses Federal Consumer Protections
In 2016, the Obama administration banned any school that received federal student aid money from including mandatory pre-dispute arbitration clauses related to federal loans, an effort to protect taxpayer dollars from being used at potentially fraudulent schools by ensuring that grievances from enrollees in problematic schools could be publicly aired through the court system. The Trump administration in 2017 tried to delay the Obama era rule on arbitration, which prompted a lawsuit. In 2018, a judge ruled that the delay of the ban was illegal, and the ban on arbitration then took effect immediately.
Still intent on getting rid of the ban, the Trump administration rewrote the Obama era rule through the regulatory process. That final rule was released September of 2019, and it overturned the Obama-era ban on arbitration. The ban on arbitration in college enrollment contracts still remains in effect, but only until July 1, 2020. Recently, lawyers working on behalf of borrowers brought a lawsuit on behalf of the New York Legal Assistance Group challenging the Trump administration’s new regulations.
States Can Take Action
The Obama administration ban on mandatory arbitration clauses in enrollment contracts is in effect until July 1, 2020, but after that, colleges would once again be permitted under federal rules to include these clauses. Because a reversal from the DeVos department is unlikely, and a potential new administration after 2020 would take time to reverse the ban, states should step up and take action now, on their own.
Certain hurdles prevent the complete eradication of arbitration in college enrollment contracts by state legislatures, as the Federal Arbitration Act (FAA) preempts states from disfavoring or singling out arbitration in a particular type of claim. A state can pass a law that limits arbitration, as long it would be applicable to all contracts generally. Furthermore, when states are acting as a market participant purchasing services, and not as a regulator, the preemption concerns of the FAA do not create a barrier to state action.
States certainly participate in the educational market when they contract out for educational services through their state grant aid programs; as a result, they could properly manage and protect their government-appropriated investment when contracting out for educational services by eliminating secret arbitration proceedings that mask fraud or poor quality educational services. States could also, more broadly, require schools within the state to report all disputes initiated by their enrollees, regardless of whether they went through arbitration or the court system, alerting states to potential patterns of bad behavior.
Several states, such as Virginia and New Jersey, are pursuing this course of action to protect their investments. In Virginia, a bill recently passed by both chambers prohibits an institution from permitting mandatory arbitration clauses in enrollment contracts as a condition for enrollment if that institution wants to receive state aid. In New Jersey, a bill with similar legislative language prohibits students from receiving state aid if the institution they attend requires them to sign a mandatory arbitration clause in an enrollment contract as a condition for enrollment.
Mandatory arbitration clauses in college enrollment contracts prevent the government from determining, among other things, if any school is routinely defrauding consumers. The federal ban on such clauses has already had an impact on the ability of students to bring potential issues to light: in an April 2020 class action suit against Florida Career College (FCC), a Florida-based for-profit college chain, a group of students is alleging that the school sells a predatory product using high-pressure sales tactics and false representations, and that the school targets students based on race. Because the ban was in effect during the time period in question, FCC would lose access to federal aid if the school were to try to force students into arbitration.
While reinstating the ban on mandatory arbitration via a federal reversal would ultimately do the most to save taxpayers money and protect consumers, it is unlikely to happen under this administration. In the meantime, states can take action to protect their own investments, and, in doing so, their students as well.