Feds propose rule to help students sue colleges

The Obama administration proposed new rules Monday to strengthen protections for student borrowers and safeguard their right to settle disputes with for-profit colleges in court.

Under the Education Department rule, both for-profit and nonprofit colleges and universities that receive federal funds would be prohibited from including forced arbitration clauses in student enrollment contracts. These clauses — typically buried in the fine print — revoke a student’s right to settle a dispute with a school in court or join a class action lawsuit.

{mosads}“These regulations would prevent institutions from using these clauses as a shield to skirt accountability to their students, to the Department and to taxpayers,” Under Secretary of Education Ted Mitchell said in a statement. “By allowing students to bring lawsuits against a school for alleged wrongdoing, the regulations remove the veil of secrecy, create increased transparency, and give borrowers full access to legal redress.”

The rules announced Monday also streamline relief for student borrowers who have been defrauded or deceived by a school. It would also create a process for group-wide loan discharges when large numbers of students have been victims of misconduct.

Under the rules, financially risky schools would be required to provide clear, plain-language warnings to prospective students, current students and the public. 

“We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” Education Secretary John King Jr. said in a statement. “All students who are defrauded deserve an efficient, transparent, and fair path to the relief they are owed, and the schools should be held responsible for their actions.”

Public Citizen, which petitioned the department back in February to ban schools from using forced arbitration clauses, called the proposed rule an “important step forward.”

“The proposal would save U.S. taxpayers money and help to make whole the thousands of students who are being swindled by hucksters masquerading as schools,” the group’s attorney, Julie Murray, said in a statement.

“We do, however, have concerns that the department’s proposal would continue to permit schools to use pre-dispute arbitration agreements against vulnerable students by portraying the agreements as ‘voluntary,’ even when students feel compelled to sign them.”

Public Citizen urged the department to adopt a rule with “teeth.”

It suggested prohibiting all pre-dispute arbitration agreements with students, not just those that a school expressly conditions on a student’s enrollment or right to continue at a school. It also said the department should broaden the scope of covered claims and ensure that all students, not just federal borrowers, are covered by the rule if they attend a school that receives federal aid.

The rule is scheduled to be published in the Federal Register on Thursday. Public comments will be due by Aug. 1, and the department said it expects to have a final rule by Nov. 1.