A recent study found that almost all of the nation’s largest for-profit college chains have enrollment agreements that block students from suing the school and prevent them from joining in class actions against these colleges. Following the 2015 bankruptcy and collapse of mega-chain Corinthian Colleges Inc., the sagging numbers at University of Phoenix, last week’s death knell for Brown Mackie College, and pending investigations and lawsuits against ITT and others, the Department of Education has decided that maybe these schools — which reap billions in federal aid each year — should probably have to be held accountable in a court of law when they screw students over.

This morning, the regulators proposed a massive overhaul [PDF — it’s 530 pages; you’re probably not going to read it] of its “Borrower Defense” policy, which allows students at failed schools to appeal to get out of their federal loan obligations. As part of that proposed rulemaking, the department is making some pro-student tweaks to how schools can employ these anti-lawsuit arbitration clauses.

Just a quick refresher: pre-dispute arbitration clauses force both parties to resolve any legal matters outside of a court of law, through a third-party arbitrator. Damages are limited (so good luck finding an attorney to represent you), and decisions are final (even if the arbitrator makes a huge error).

Additionally, most of these clauses include so-called “go it alone” conditions that ban the student from entering into a class action, even through arbitration. Thus, each aggrieved student must mount their own complaint, and since arbitration rulings are often secretive and never precedent-setting, two students can have different outcomes presenting the exact same evidence.

Additionally, many arbitration rulings include nondisclosure agreements for all parties, meaning that even if a student prevails in demonstrating the school screwed up, the world will not know.

These sorts of clauses are virtually unheard of outside of the for-profit education realm, but are virtually ever-present at for-profit educators. The University of Phoenix recently announced that its new owners are doing away with the clauses starting July 1, while the non-profit that acquired a number of Corinthian’s locations likewise did away with them.

However, that change is too late for the thousands of CCI students left with huge student loan debt after the school’s failure. The folks at Education contend that, had students been able to file class actions against CCI before its bankruptcy, the school could have addressed the shortcomings that ultimately led to its demise.

Instead of preventing CCI’s collapse, these students now only have the option of the Borrower Defense program, resulting in millions of dollars in forgiven federal loans.

The proposed rule would, for schools that want federal aid, ban the use of mandatory arbitration clauses and bans on class actions. Students could choose to pursue arbitration after filing a dispute with the school.

In an effort to add more transparency to the process, schools would also be required to tell the Secretary of Education each time arbitration or judicial claimed are filed. Additionally, the schools must also share information about whatever comes out of those disputes, regardless of whether they happen in the courtroom or in arbitration.

Julie Murray, an attorney for Public Citizen — one of many groups who have called for an end to federal funding for schools that force arbitration on students — says the proposed rule should ultimately save taxpayers money and “help to make whole the thousands of students who are being swindled by hucksters masquerading as schools.”

At the same time, Murray raised concerns about the potential for schools to still use “voluntary” arbitration clauses in their enrollment agreements. If arbitration is the default option, then students may sign away their rights to sue without even knowing it.

In addition to the arbitration changes, the proposed rules introduce a slew of changes to the Borrower Defense process.

Until the recent for-profit failures, Borrower Defense applications had been a rare occurrence, thus the standards and processes involved were not exactly clear. Today’s proposal sets forth more specific benchmarks for situations where students would be eligible for loan relief.

There would have to have been a breach of contractual promises between the school and the student; a state or federal court would have had to rule against the school regarding the educational services for which the loan was made; and the school would have had to make a “substantial misrepresentation” about the nature of its educational program.

To cut down on the glut of Borrower Defense applications that can come when a school closes, the rules also open the door to considering group-wide discharges, allowing the Dept. of Education to provide relief to borrowers whose claims share similar characteristics.

In an effort to limit taxpayers’ liability for bad schools, the proposed rules seek to hold colleges more accountable before they go under.

Schools would now be monitored for a number of early warning signs:
• Lawsuits from a state attorney general, the Federal Trade Commission, or the Consumer Financial Protection Bureau;
• Schools defaulting on their debt obligations;
• A substantial number of Borrower Defense claims brought against the school;
• Schools that receive more than 90% of their revenue from federal aid;
• Schools where more than half of its eligible graduates are not meeting federal Gainful Employment standards;
• The school’s accrediting body takes an action that could result in the loss of accreditation.

When such red flags are raised, schools could be required to put up funds, in the form of letters of credit, that totaling at least 10% of the amount of federal aid money the school received in the previous year. This money could be used to cover the cost of Borrower Defense and other claims.

Additionally, students at these schools would be warned that their college is under increased scrutiny for these indicators of potentially impending doom.

In fact, all for-profit colleges would need to warn prospective students if that school’s students have a history of poor loan repayment. This could be an indicator to incoming students that this school is not providing an education that will result in gainful employment after graduation.

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