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.