A few weeks
ago, the Student Loan Ranger summarized the Department of Education's recently proposed draft rules that
would make it easier for defrauded student loan borrowers to have a portion or
all of their federal student loans discharged.
Within that
same draft rule, the Department of Education also proposed some additional
changes that are intended to help protect students and the federal taxpayer by
increasing transparency, installing some financial protections and ensuring
that consumers have multiple avenues for potential relief if something should
go wrong.
These
changes will also make it easier for those who pay for education expenses out
of pocket or with private student loans to obtain relief if their school
misrepresents itself or educational outcomes.
Arbitration
is a process where claimants have agreed to have a third party rule on their
dispute. The draft rule would in some cases prohibit schools that are
participating in the federal direct loan program from using mandatory
predispute arbitration.
Although, as
we discuss below, predispute arbitration can be harmful to consumers, not all
arbitration or mediation is bad. Once finalized, the draft rules will only
bring possible relief to those students who financed their higher education
with federal student loans.
However,
defrauded students have often paid for a portion of their expenses out of
pocket or through private or state loans. Because the discharge rules don’t
allow for recovery for those amounts, arbitration or legal proceedings may be
students' only way to possibly receive reimbursement in cases of school fraud
or misrepresentation.
The Trouble
With Predispute Arbitration Clauses
In recent
years, some industries, including educational institutions, have begun
inserting mandatory predispute arbitration clauses in their contracts with
consumers. Since 2011 when the Supreme Court affirmed the use of such clauses,
hundreds of higher education institutions have added them, or similar
restrictions, to the enrollment contracts students are required to sign to
attend.
The Consumer
Financial Protection Bureau recently found that such clauses are especially
prevalent in the consumer finance area – with almost half of all credit card
accounts subject to mandatory predispute arbitration clauses.
Courts often
encourage arbitration as a way to save costs for both the claimants and the
court system in cases of routine disputes, especially those that arise between
businesses. Opponents of such clauses claim that mandatory arbitration often
favors the business that required the clause in the first place.
Some
arbitration clauses, for example, require the hearing to be held in a location
that may be convenient for the business but inconvenient to the consumer. In
addition to these travel costs, some consumers may incur hundreds of dollars in
filing fees just to initiate the process.
In the
higher education world, the school often pays for or at least chooses the
third-party arbitrators, making it difficult to prevent bias if the arbitrator
has the possibility to obtain a repeat customer.
The other
problem with these clauses is that they can cost the consumer many of their
rights to bring any future disputes to court, effectively preventing many
class-action suits.
Due to their
very nature, though, class-action suits can put the consumer on more equal
ground with the business because they consolidate resources and the potential
evidence related to multiple claims with the same complaint. Class-action suits
can also be an effective way for consumers to pursue relief when the same
conduct or behavior has harmed them.
If
finalized, the draft rule would prevent a school from forcing students to use
arbitration or an internal process in cases where students feel they have a
case that the school violated state laws in relation to the students' federal
direct loans or the educational services the school provided.
However,
because of the Department of Education's limited authority, the rule would not
prevent a school from requiring arbitration and prohibiting participation in a
class action lawsuit for other types of claims.
The Case for
Arbitration
As we
mentioned above, the Student Loan Ranger wants to be clear that not all
arbitration or mediation is bad. In fact, in many cases, arbitration between
two parties who are on equal footing can be a much more reasonable and even
fairer option than going through the often lengthy and expensive court process.
Many
businesses choose to use a mutually agreed-upon arbitrator to resolve a dispute
after it arises to avoid the costs of litigation. And many states encourage
such action to relieve the burden of these cases on the court system.
This is why
we support that the draft rule does not prevent arbitration across the board
but rather ensures that arbitration can only be used if both parties are
agreeable to it.
Even then,
the draft rule would require schools to communicate such cases of voluntary
arbitration to the Department of Education to ensure the department is aware of
any potential borrower defense claims, even if the borrowers never file for
discharge.
Proponents
of mandatory arbitration clauses argue that prohibiting the clauses will put
many schools out of business due to increased legal expenses. Draft rule
supporters, though, point out that a majority of nonprofit colleges and
universities don't have such clauses and they seem to be doing just fine.
Regardless
of how the Department of Education finalizes the draft rule, the trend for
mandatory predispute arbitration clauses in higher study loan may be waning. In
May 2016, Apollo Group – the University of Phoenix parent company – announced
it would no longer use these clauses with students. We hope this is just the
beginning of other schools following suit.
Source: https://educationloansinindia.wordpress.com/2016/07/18/how-arbitration-helps-hurts-defrauded-student-loan-borrowers/
