Student Loans and For-Profit Schools

Private student loan agreements and for-profit college and trade school enrollment contracts frequently contain forced arbitration provisions. (Federal student loan agreements do not.) In 2015, the Consumer Financial Protection Bureau (CFPB) reviewed contracts from six of the largest private student lenders along with a contract used by affiliates of Credit Union Student Choice, and found that six of the seven lenders included forced arbitration provisions. For-profit colleges also widely use forced arbitration clauses in their enrollment contracts.

In 2016, the U.S. Department of Education under the Obama administration promulgated the Borrower Defense rule, which has been one of the most important measures to date in protecting student borrowers. Among other things, the rule prevents colleges that take federal aid from blocking access to courts when students are defrauded by prohibiting predispute arbitration agreements. Despite the Trump administration’s efforts to alter the rule to allow for forced arbitration, it was successfully implemented following litigation by Public Citizen in 2018. However, agency guidance released by the administration in 2019 sought to limit its impact by clarifying that the rule was narrowly limited to borrower defense claims, and that “[n]othing in these regulations prohibits an institution from having and enforcing a mandatory predispute arbitration requirement or class action ban” relating to other types of claims by students. The guidance specifically indicated personal injury and sexual and racial harassment claims as areas where schools can force their students into arbitration.

The CFPB’s Forced Arbitration rule, which was repealed under the Congressional Review Act in 2017 along with 14 other important Obama-era public protections, would have prohibited student loan contracts from containing forced arbitration clauses with class action bans. However, two bills introduced in Congress, the Forced Arbitration Injustice Repeal (FAIR) Act and the Court Legal Access and Student Support (CLASS) Act, would restore access to the courts for students defrauded by for-profit schools.

Forced arbitration provisions and class action bans insulate student lenders and for-profit colleges from liability for their misconduct. This is cause for alarm at a time when millions of student borrowers across the country are struggling to manage their loans and government enforcement agencies have alleged that private student loan companies like Navient (formerly Sallie Mae) engaged in predatory lending schemes and widespread illegal cheating of borrowers.

A growing number of students, including military servicemembers, have also been defrauded by for-profit colleges such as ITT, DeVry and Corinthian Colleges, which have made deceptive claims about job placement rates, abruptly closed, or left students with a pile of debt for a worthless degree.

Examples

  • KeyBank: Student loan lender KeyBank used forced arbitration provisions to close the courthouse doors on student borrowers who argued they should not have to pay back loans they asserted were part of a scam involving the lender and an expensive helicopter school that abruptly closed before students could complete. The loan contract required the borrower to waive his or her right to a jury trial, restricted specific claims that could be made against the bank, limited discovery, and blocked the borrower’s right to pursue attorneys’ fees. KeyBank’s tactics demonstrate that these clauses can be used by sophisticated entities to skirt the law while victimizing student borrowers.
  • Delta Career Education Corporation: Students at Lamson College, a for-profit school in Arizona owned by Delta Career Education Corporation, had no choice but to arbitrate their disputes when they discovered the school had misrepresented the quality of the education their program offered. Their claims were largely unsuccessful, but they had no recourse even when an arbitrator ordered students to pay the school’s attorney fees.
  • ITT Technical Institutes: For years, students at ITT Technical Institutes were forced into arbitration when they had disputes and complaints against their school. Because those arbitration proceedings were private, regulators and other students missed out on the chance to learn more about the systemic issues that plagued the for-profit chain. Now, students are raising their claims against the school in the school’s bankruptcy proceedings.

News Coverage

Reset of Rules Aimed at For-Profits Begins,” Inside Higher Ed, June 2017

Student Victims Seek to Become Creditors in ITT Bankruptcy,” New York Times, January, 2017

Students Ripped Off By For-Profit Colleges Discover They Can’t Sue,” Buzzfeed News, March 2016

Reports

How College Enrollment Contracts Limit Students’ Rights

Between a Rock and a Hard Place; Courthouse Doors Shut for Aggrieved Private Student Loan Borrowers