The U.S. Department of Education has proposed regulations to strengthen a rule against predatory practices by post-secondary institutions. 

The regulations ban the use of mandatory pre-dispute arbitration clauses and class action waivers and clarify and simplify current regulations that grant students loan forgiveness if they were defrauded or deceived by an institution. The proposed regulations also would hold financially risky institutions accountable for their behavior and ban schools’ use of legal clauses to sidestep accountability.

"We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag," said U.S. Secretary of Education John B. King Jr. "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."

Under the proposed regulations, schools participating in the Direct Loan Program would be prohibited from requiring, through the use of contractual provisions or other agreements, arbitration to resolve claims brought by a borrower against the school, as well as from obtaining agreement that a borrower waive his or her right to initiate or participate in a class action lawsuit regarding such claims. 

The Education Department also is proposing to impose notification and disclosure requirements on a school regarding claims that are voluntarily submitted to arbitration after a dispute has arisen.

“These regulations would prevent institutions from using these clauses as a shield to skirt accountability to their students, to the [Education Department] and to taxpayers,” said U.S. Under Secretary of Education Ted Mitchell in a news release. “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 proposed rules also include creating a streamlined process for "borrower defense” for student loan borrowers who may have been fraud victims.

The proposed borrower defense regulations include:

  • Clarifying the process for relief for all current Federal Family Education Loan Program borrowers and current and future Direct Loan borrowers; 
  • Streamlining, after the expected July 1, 2017 effective date, the standard by which Direct Loans can be discharged and the ways in which Title IV-receiving institutions will be held accountable for their actions;  
  • Revising the closed school discharge regulations to ensure Direct Loan borrowers can benefit from their ability to receive the discharge; and  
  • Streamlining the false certification regulation for FFEL and Direct Loan borrowers.  

The Notice of Proposed Rulemaking will be published in theFederal Registeron June 16. Comments are due by Aug. 1. The Education Department indicated that it will publish a final regulation by Nov. 1.

The Education Department’s proposed regulations to ban arbitration agreements by post-secondary institutions follows the Consumer Financial Protection Bureau's announcement of its own proposed rulemaking to restrict the use of arbitration agreements by financial services companies, including debt collectors. 

The CFPB is not proposing an outright ban on the agreements, favoring stopping financial service companies from including class action waivers in mandatory arbitration agreements, as well as requiring companies to submit certain arbitration information for monitoring and publication.

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