Semester after semester, new students at Everest University, part of the Corinthian for-profit college chain, eagerly signed up for their colorfully marketed degree programs in accounting, health-care services, or other promising-looking trades, and probably barely glanced at the legalese. But buried in the fine print of Corinthian’s byzantine enrollment contract was a Trojan horse: a clause that effectively traded away students’ legal rights and bought them into an epic fraud scheme. Following Corinthian’s financial implosion last year, the Department of Education (DOE) is now finally helping cheated students undo their legal bind.
Corporations often use so-called “forced arbitration” agreements, as we’ve reported before, to preempt the rights of workers and consumers to bring lawsuits in financial or work-related disputes. Conflicts are instead channeled into out-of-court arbitration procedures with a private mediator (typically a management-approved third-party agent). The agreements may also restrict consumers from bringing class-action lawsuits as a group, or impose gag orders on signatories to prevent public exposure of disputes.
A cascade of fraud scandals in recent years has left thousands of former for-profit college students with worthless diplomas, but their enrollment contracts continue to block their access to civil courts.
The proposed rule, now pending a public comment period before being finalized, would not ban arbitration agreements outright, but would broadly prohibit for-profit schools from “us[ing] their enrollment agreements, or other pre-dispute arbitration agreements…to force students to go it alone by signing away their right” to wage joint lawsuits or complaints publicly about misconduct.
Since the rule would cover institutions benefiting from federal direct loan funds, a crucial funding spigot for for-profit colleges and trade schools, advocates say it would likely change contracting practices throughout the industry.
The new rules complement a parallel effort by the DOE to expand an obscure legal mechanism known as “Defense to Repayment,” as a legal channel to provide loan “forgiveness” to aggrieved former students. The DOE promises to expand the process to grant discharges to groups of victims of scandal-ridden for-profit schools like Corinthian’s, though relief has been halting so far.
While advocates generally support the DOE’s initiative, for many, the measures don’t go nearly far enough to address either “rip-off clauses” or the underlying student-debt crisis. Meanwhile, many schools nationwide continue to spiral into financial turmoil, with for-profit schools making up an estimated half of student loan default cases nationwide, with about one-fifth of all student loans in default.
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According to Julie Murray of Public Citizen, even under the proposed reforms, students could still be subjected to a financial bait-and-switch when presented with a contract that stipulates a nominally “voluntary” arbitration provision:
The department’s proposal would treat that contract as “voluntarily” entered into by the student and thus permissible, but we expect schools will abuse this loophole by leading students to believe through the actions of their enrollment agents that the arbitration agreements are necessary to enroll, despite what the fine print says.
Arguably, doing any business with a predatory industry carries risk of exploitation: “This rule is intended to target schools that engage in fraud as a business practice,” Murray says via e-mail. “It is naive to believe those same schools will accurately explain a so-called voluntary pre-dispute arbitration agreement.” The truly protective solution would be “to prohibit pre-dispute arbitration agreements altogether,” so students would decide on arbitration only “once a dispute arises, with their eyes wide open.”
Just as for-profit college scams represent the dregs of a cesspool of debt pervading the higher education infrastructure, the scandalized schools’ forced arbitration clauses reflect an underlying pattern of economic predation: coercive arbitration agreements have curtailed access to civil courts for workers and consumers in many sectors, through contracts for employment and various financial services. Outside of higher education, Bob Shireman of the Century Foundation says via e-mail, “This proposed rule does not address the broader problem of forced arbitration undermining consumers’ rights and inviting abuse across the U.S. economy.”
Meanwhile, the grassroots economic-justice campaign Debt Collective, points out major shortcomings in the reform plans: DOE officials would have the final word on who is eligible for relief, exposing claimants to opaque and arbitrary reviews, with no guarantee of much-needed collective relief for all former students of major profiteers like Corinthian. Moreover, since the proposal is based on the federal Direct Loan program, some claimants under a parallel loan system, the Federal Family Education Loan Program, could face additional, potentially prohibitive eligibility requirements.
The Debt Collective, which continues to campaign for justice for victims of for-profit college scams through direct-action campaigns and debt strikes, had long pressured DOE for a more robust, expansive Defense to Repayment process. The proposed rules are a step forward, but the group concludes, “we continue to believe that the Department is making it far too difficult for students to get the relief they are entitled to by law,” and vows to keep pressuring authorities to follow through on a plan that, so far, “amounts to little more than a loose statement of intention to do right by student debtors after decades of collaboration with corrupt for-profits.”
Meanwhile, the industry may start ballooning again. As New York magazine reports, some schools are still gearing up for a comeback: The University of Phoenix, which has seen share prices fall by about 80 percent, is reportedly negotiating a new deal with a private equity firm. In the 2014-2015 school year, despite the scandals, for-profit higher-education institutions absorbed about one-fifth, or $16 billion of $96 billion, of total federal student-loan dollars.
So despite the flood of scandals, neither the government nor its client schools seem to have learned the lesson that the whole enterprise of for-profit higher education is both ethically bankrupt and financially unsustainable. But the aspiring students, veterans and working-class parents saddled with debt-soaked scam diplomas, learned the hard way. If there is any real redemption for this debtor class, it’s the movement their outrage has helped spawn. While profit-seeking institutions and their creditors, also known as our government, mete out another round of potentially toxic loans, a rising cadre of grassroots financial-justice activists continues mobilizing for a school system where a higher education is a social right, not a lifelong debt.
