These so-called mandatory arbitration clauses routinely appear in the fine print of auto loans and credit cards, but a new study from the Century Foundation examines why they have no place in higher education.
“These clauses let companies engage in questionable activity, feel more comfortable with aggressive recruiting,” said Robert Shireman, a senior fellow at the Century Foundation and co-author of the report. “Most students when they’re signing up for college are assuming this is their ticket to a great future. They are not considering the possibility that what the college has been telling them is exaggerated or untrue.”
Shireman and his colleague, Tariq Habash, got a hold of enrollment contracts from 271 schools and found four types of restrictive clauses — forced arbitration, go-it-alone, gag and internal process requirements — meant to prevent students from banding together or airing their grievances outside the confines of the school. Traditional nonprofit colleges rarely use these clauses, which have become a standard feature in many contracts drawn up by for-profit institutions receiving federal financial aid dollars, like Kaplan University or Devry University, the report said.
Few students are aware these restrictions exist until problems arise and they try to seek redress. Of the four types of clauses, forced arbitration has received the most attention because of the pernicious way it favors companies. Critics have decried arbitration as a secretive process that lets companies dictate the terms of negotiations. Arbitrators rely on a company’s repeat business, making them more inclined to rule in the company’s favor, the report said.
Companies, however, argue that they can lower the cost of delivering education by avoiding high-priced litigation. The goal of arbitration is to reduce time and costs for both sides, said Steve Gunderson, president of the Association of Private Sector Colleges and Universities, a group representing for-profit colleges.
“There should be ways to resolve issues that protect students with legitimate concerns in ways that enable them to have their cases heard — whether by arbitration, mediation or other means,” Gunderson said in an email. “If we are serious about protecting students, we should not make class action suits that enrich trial lawyers the default option.”
Shireman and Habash contend that the inherent conflict of interest in arbitration agreements have turned them into a shield that invites abuse by businesses, rather than an efficient means of resolving disputes. And government regulators are inclined to agree.
A recent study from the Consumer Financial Protection Bureau found that the agreements often lead to poor outcomes for consumers. Arbitrators in the cases the bureau examined rarely ruled in favor of consumers, and even when they did, arbitrators awarded paltry sums.
The Department of Education is also taking a closer look at mandatory arbitration clauses, considering an all-out ban or limiting their use in enrollment contracts. The issue surfaced in March during negotiations to revise borrower defense to repayment, the process by which students can have their federal loans discharged.
Advocacy groups petitioned the agency to make it easier for students who feel they’ve been wronged to hold colleges accountable. If students had an easier time suing schools, they would be less likely to turn to the government for relief, saving taxpayers from picking up the tab for the misdeeds of private companies.
At the time, Under Secretary Ted Mitchell said, “The department is working to ensure that no college can dodge accountability by burying ‘gotchas’ in fine print that blocks students from seeking the redress they’re due.”
With negotiators failing to reach an agreement, it is now up to the department to write the rules, which may put an end to arbitration clauses in education contracts once and for all.
“These colleges that are using forced arbitration are targeting federal financial aid money, and therefore it is appropriate for the Department of Education to respond by banning these kinds of provisions,” Shireman said.
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